This article first appeared in The Edge Financial Daily on May 14, 2019
PPB Group Bhd
(May 13, RM18.62)
Maintain underperform with a lower target price of RM16: Wilmar International Ltd’s first quarter of financial year 2019 (1QFY19) core net profit (CNP) of US$342 million (RM1.42 billion) (+9% year-on-year [y-o-y], +43% quarter-on-quarter [q-o-q]) came within expectations; at 27% of consensus full-year estimate and 29% of ours. Its 1QFY19 fresh fruit bunch (FFB) output of 905,000 tonnes (-8% y-o-y) was also broadly in line with our full-year estimate of 4.32 million tonnes (+5% y-o-y) at 21%, as production usually picks up in the second half-year. As expected, no dividend was declared for the quarter.
The 9% y-o-y improvement in 1QFY19 CNP to US$342 million was largely driven by the tropical oils (TO) segment. Despite a price-driven revenue drop of 13% in the TO segment, pre-tax profit (PBT) soared 81% on higher sales volume (+8%) and cheaper feedstock, augmenting PBT margin from 2.3% in 1QFY18 to 4.8% in 1QFY19. However, its oilseeds and grains (O&G) segment posted a 47% drop in PBT due to lower sales volume (-4%) and dented soybean crush margins amid the African swine fever outbreak in China. The 43% q-o-q increase in 1QFY19 CNP was also driven by the TO segment (PBT: +37%) but dampened by the O&G division (PBT: -21%), due mainly to the same reasons.
Moving into 2QFY19, we believe Wilmar’s earnings could see further improvement on stronger O&G performance. We believe crush margins will improve in 2QFY19 as the adverse effect of the African swine fever outbreak subsides. Additionally, Brazilian soybean crops have entered the main harvesting month in March, replenishing soybean supply and easing prices, which also bodes well for crush margins. In the TO segment, earnings could soften marginally as crude palm oil (CPO) prices have trended down since mid-February. Fortunately, the group has locked in feedstocks (CPO and palm kernel) at low prices during 4QFY18 as hinted by the management earlier (likely even lower than current levels), though details regarding the hedging terms/duration were not disclosed. This should keep the segment’s processing margins relatively stable. — Kenanga Research, May 13