Period  2Q14/1H14

Actual vs. Expectations PPB’s 1H14 core net profit (CNP) of RM311m is considered in line although it only makes up 40% of consensus forecast (RM780m) and 42% of our forecast (RM742m) for FY14. On average, the 1H normally constituted 43% of full-year earnings for the past 3 years. This is due to seasonal factor in Wilmar’s sugar milling business in Australia which usually makes a loss in 1H before returning to profitability in 2H due to the timing of sugar cane harvesting.

Dividends  As expected, a 7.0 sen dividend was announced. We are expecting another 11.1 sen final dividend to boost full-year FY14 dividend of 18.1 sen, implying 1.2% dividend yield.

Key Results Highlights YoY, 1H14 CNP slipped 21% to RM311m due to lower profit contribution from Wilmar (-35% to RM196m). As mentioned in our report dated 8-Aug-2014, Wilmar’s earning is lower due to losses before tax experienced at its OAG division. However, PPB’s core operations’ earnings growth with EBIT rising 8% to RM185m cushioned the decline at the Group level.

 QoQ, 2Q14 CNP improved 15% to RM166m due to improved profit from PPB’s Grain Trading, Flour and Feed Milling (GFF) division (PBT+35% to RM50m). We gather that GFF division enjoyed better sales and improved margin as it benefited from favourable grains trading conditions. Wilmar contribution was flattish QoQ (+2% to RM99m).

Outlook  Management guided that PPB’s own core operations are expected to perform well but its overall financial results will continue to be contingent on Wilmar’s performance.

 In our view, PPB’s FY14E CNP should decline by 23% to RM742m due to expected lower earnings contribution from Wilmar.

Change to Forecasts   Maintain our earnings forecast for both FY14E (RM742m) and FY15E (RM911m).

Rating Maintain MARKET PERFORM

 Short-term catalyst is limited due to weak 1H14 earnings. However, downside risk is limited as Wilmar margin should improve in 2H in view of lower material cost from the current low prices of soybean and CPO. On the possibility of Indonesia limiting foreign ownership of plantation land, we think the net earnings impact to PPB is small at about 7% as Wilmar business is diversified across five divisions and across Asia.

Valuation  Maintain our TP of RM15.00 based on unchanged Fwd. PER of 19.5x on FY15E EPS of 76.9 sen. Our Fwd. PER of 19.5x is based on mean valuation.

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

Source: Kenanga