We attended Wilmar’s 2Q15 Analysts’ Briefing, which was well attended by about 50 participants. We came back reassured on Wilmar's earnings sustainability due to rising refining and crush margin outlook. However, low commodity prices and soft global demand could limit further growth. After adjusting for Wilmar’s better processing margins but lower Consumer segment’s growth, we revise up our PPB FY15-16E estimates by 4-2% to RM1.01b-RM1.06b to reflect higher than expected contribution from Wilmar. We maintain our MARKET PERFORM call on PPB but with a higher TP of RM16.95 (from RM16.50) based on unchanged Fwd. PER of 19.5x on higher FY15-16E average EPS of 86.9 sen.

Better refinery outlook. Management believes that 2H15 refining margins are likely to improve post-implementation of the Indonesian palm oil levy as the levy on CPO is higher than that of processed products, thus providing an implicit margin. The levy also has the dual effect of increasing demand of refined products and increasing supply of local CPO, which should improve demand for refining capacity. As we agree with management’s assessment, we have upped our FY15-16E downstream margin assumptions resulting in higher Tropical Oils segment’s EBIT of USD1.11b-USD1.17b (+7- 4%).

CPO outlook neutral-to-negative. We gather that Wilmar’s management expects limited impact on prices from El Nino as global weather has been reasonable, with sufficient rainfall seen in India, Asia-Pacific and the Americas. Factoring in low crude oil prices, management appears to maintain their bearish outlook on the near-to-mid term CPO prices. While we agree that near-term outlook is likely to remain lacklustre, we maintain our CPO assumptions as we expect mid-to-long term outlook to improve. This is because production of other oils such as rapeseed, sunflower and peanut oils are expected to be lower in the coming months, which will increase global reliance on palm and soy oil.

Consumer segment to see limited growth. We think that Consumer products volume is likely to stay soft as management mentioned that Wilmar’s main market in China is seeing weaker growth on its austerity measures. Meanwhile, the frontier market in Africa may not grow as rapidly due to declining agri-commodity prices and lack of infrastructure. We concur with management’s view, and accordingly lower our FY15-16E Consumer segment revenue growth forecast to 2% (from 5% previously).

Upgrade PPB’s FY15-16E earnings estimates to RM1.01b- RM1.06b after imputing for Wilmar’s better processing margins but lower Consumer segment’s growth. Wilmar’s FY15-16E earnings are increased to USD1.25b-USD1.33b (from USD1.19b-USD1.30b). As a result, we revise up our PPB earnings forecast by 3.6-1.8% to RM1.01b-RM1.06b.

Maintain MARKET PERFORM on PPB with higher TP of RM16.95 (from RM16.50) based on an unchanged Fwd. PER of 19.5x on higher FY15E EPS of 86.9 sen (from 84.7 sen). Our 19.5x Fwd. PER is based on the 3-year historical mean PER. We maintain our MARKET PERFORM call on PPB as we think the improving outlook in Wilmar’s O&G and plantation downstream segment could be limited by a slower Consumer segment and lacklustre short-term commodity prices. Risks to our call are lower-than-expected earnings from Wilmar or PPB’s core business divisions.

Source: Kenanga Research - 7 Aug 2015