Wilmar’s 1Q16 core earnings at USD222.4m missed our and market forecast at 18%. No dividends as expected. Wilmar’s FY16-17E earnings were reduced by 11-10% on lower crush margins and FFB production, resulting in PPB’s FY16-17E earnings being reduced 5%. TP reduced to RM16.60 while MARKET PERFORM call is maintained.

Missed expectations. Wilmar’s 1Q16 core net profit (CNP*) of USD222.4m missed expectations, making up 18% of both consensus and our forecast of USD1.23b and USD1.24b, respectively. This was due to scheduled maintenance in the Sugar division in 1H, which led to LBT of USD18m for the quarter. Additionally, the Tropical Oils (TO) segment saw lower-than-expected FFB production, dropping 6% compared to our expected 1% growth. No dividend was declared, as expected.

Improving in key segments. Despite lower FFB production, the TO segment saw PBT improvement at +8% YoY and +33% QoQ due to higher CPO prices and biodiesel contribution, which further improved its downstream performance. The Oilseeds and Grains (O&G) segment PBT rose 2% YoY and 3% QoQ as sales volume rose in tandem with recent strong soy demand in China. Meanwhile, the Sugar segment saw a major reduction in losses by 73% to USD18.2m on driven by better sales volume for its consumer products.

Biodiesel boost, soy setback. For the TO segment, Indonesia’s Pertamina and AKR are committing up to 1.60m kiloliters (kl) or c.1.41m MT of biodiesel for May-Oct 2016. Hence, we are expecting the segment to record decent margins in 2Q16. However, in the O&G segment, rising soybean arrivals in China is likely to lower crush margins at Wilmar’s soy crushing plants.

Reduce Wilmar’s FY16E and FY17E CNP by 11% and 10% to USD1.11b and USD1.19b, respectively, to account for lower crush margins and lower FY16E FFB production from +1% to -7% to reflect the drought effect on Malaysian and Indonesian plantations. As a result, PPB’s FY16-17E CNP is reduced by 5% to RM0.97-1.05b.

Maintain MARKET PERFORM with lower TP of RM16.60 postearnings adjustments as we roll forward our valuation base year to 1H17E (from FY16E) for updated EPS of 85.1 sen (previously 86.7 sen). Our TP is based on an unchanged Fwd. PER of 19.5x based on the 3-year historical mean. We maintain our MARKET PERFORM call on PPB on Wilmar’s positive TO segment outlook due to biodiesel contracts could be limited by weakening crush margins in the O&G segment. Downside risks to our call are lower-than-expected earnings from Wilmar or PPB’s core business divisions. 

Source: Kenanga Research - 11 May 2016