We attended Wilmar’s 4Q14 Analyst Briefing which was well attended by about 50 persons and came away feeling neutral on its outlook. During the meeting, the Company mentioned that: (i) lower commodity prices will be offset by lower downstream costs, (ii) slowing consumption in China is likely to limit earnings growth, (iii) they have a modest FFB growth outlook in the Plantation segment, and (iv) they lean towards bearish on CPO price outlook. We maintain our FY15E-FY16E earnings on PPB pending their upcoming 4Q14 results. While we are overall neutral on Wilmar’s outlook, a weaker ringgit could result in better dividend and earnings for PPB. Maintain MARKET PERFORM on PPB with TP of RM15.26 based on unchanged Fwd. PER of 19.5x on FY15E EPS of 78.2 sen.

Lower commodity prices offset by lower downstream costs. Although weaker CPO prices may negatively impact Wilmar’s upstream divisions, this could be offset by lower feedstock costs in its downstream processing businesses. However, we think that margin expansion could be limited by excess capacity in Malaysia and Indonesia which should continue for the next 6-12 months. Hence, we maintain our EBIT/MT estimate at USD33- USD32/MT which translates into PBT of USD721m-USD697m.

Slowing consumption in China to limit earnings growth in Oilseeds & Grains (O&G) and Consumer Products (CP) segment. We gather that the push for austerity in China has reduced consumption considerably. Hence, management expects the rate of growth in the O&G and CP segment to slow in the next 1-2 years. Note that China revenue of USD22.0b makes up 50% of WIlmar’s earnings of USD44.1b. We concur with management as we think the slower growth in China is likely to dampen O&G PBT margins to <1% (USD81m-USD92m) in FY15E and FY16E while CP segment PBT margin should remain flattish at about 3.5%-4.0% (USD270m-USD298m).

Modest FFB growth outlook for Plantations side. Management expects flat FFB growth in its Malaysian plantations going forward while the Indonesian side should see 4-5% growth in FY15. This is in line with our estimate of overall FFB growth of 3.5% in FY15 to 4.48b metric tons (MT) which is lower than sector average growth of 6.5%.

Bearish tone on CPO. Management noted that the CPO outlook in FY15 is less bright due to low crude oil prices and the narrowing CPO-soybean oil (SBO) price spread (currently at USD55-60/MT from a 5-year average of USD187/MT). They also noted that China has reduced its imports of CPO because of negative marketing campaigns. We concur as we think that CPO prices are likely to weaken in 2H15 to RM2,200/MT from about RM2,250-RM2,300/MT currently.

 Maintain PPB FY15E-FY16E earnings of RM770m-RM927m pending PPB’s results, tentatively on 27-Feb-15. While we are overall neutral on Wilmar’s near-term outlook, the weaker Ringgit could result in a more favorable dividend as well as higher reported earnings from PPB’s 18% stake in Wilmar. Should all go well for PPB’s non-Wilmar segments, we could raise PPB’s FY15E earnings by 1-2% on the back of Wilmar’s 4Q14 earnings exceeding expectations.

Maintain MARKET PERFORM on PPB with TP of RM15.26 based on unchanged Fwd. PER of 19.5x on FY15E EPS of 78.2 sen. Our 19.5x Fwd. PER is based on the 3-year historical mean PER. However, if PPB’s FY15E earnings are revised up on upcoming results due to the abovementioned reasons, our TP could be raised up to RM15.42 though our call remains as MARKET PERFORM due to our expectations of flattish CPO prices and lackluster Chinese demand growth in FY15E. Risks to our call are lower-than-expected earnings from Wilmar or PPB’s core business divisions. 

Source: Kenanga