Period  1Q14 for Wilmar International Ltd.

Actual vs. Expectations Wilmar’s 1Q14 core net profit* (CNP) of USD215m is below expectations as it makes up only 15% of consensus forecast of USD1.44b and ours at USD1.43b.

 Wilmar’s Oilseeds and Grains (OAG) division unexpectedly registered Loss Before Tax (LBT) of USD57m as crush margin turned negative in China soybean crushing industry. We gather that this is caused by excessive import of soybeans into China and lower demand of soybean meal because of bird flu and slower economy activity in China.

Dividends  As expected, no dividend was announced.

Key Results Highlights YoY, Wilmar’s 1Q14 CNP declined 32% to USD215m as OAG division registered LBT of USD57m (against 1Q13 PBT of USD47m) due to reason stated above. However, the earnings decline was alleviated by a 53% improvement in plantation upstream division PBT to USD110m.

 QoQ, Wilmar’s 1Q14 core net profit declined 39% to USD215m as OAG division registered LBT of USD57m (against 4Q13 PBT of USD116m) due to reason stated above. However, the earnings decline was alleviated by 27% increase in plantation upstream division PBT to USD110m.

Outlook  The unexpected LBT experienced at Wilmar’s OAG division is likely to affect PPB’s upcoming 1Q14 result in 2nd half of May. However, the short-term negative margin condition in China soybean crushing industry is unlikely to continue for the long-term as the resultant consolidation should benefit Wilmar in the long run. Hence, we maintain our view that the OAG division margin is likely to return to positive for the full-year FY14, although it should come in lower than our earlier estimate.

 Note that profit contribution from Wilmar accounted for 71% to 76% of PPB total PBT in the past 3 years.

Change to Forecasts PPB’s FY14E earnings reduced by 3% to RM938m while FY15E earnings trimmed by 3% to RM968m. We have assumed lower margin for Wilmar’s OAG division at USD6.5 per MT (from USD9.5 per MT previously).

Rating Downgrade to MARKET PERFORM

The lower-than-expected results from Wilmar are likely to limit PPB’s share price upside.

Valuation  Our TP is reduced to RM16.55 (from RM17.00) based on an unchanged Fwd. PER of 20.9x on lower FY14E EPS of 79.1 sen (from 81.2 sen).

Risks to Our Call Lower-than-expected earnings from Wilmar or PPB’s own business divisions.

Source: Kenanga