PPB Group (PPB)’s associate Wilmar issued a profit warning with 2Q16E loss of USD230m due to weakness in its Oilseed Manufacturing and Sugar businesses. While the weakness is not surprising, the quantum of loss is above expectation. Wilmar FY16-17E CNP is cut by 14-4% to USD950m-1.14b, consequently reducing PPB FY16-17E CNP by 10-3% to RM870m-RM1.01b. Downgrade to UNDERPERFORM with lower TP of RM15.50 (from RM16.60) post earnings reduction.

Wilmar profit warning. PPB’s 18% owned associate. Wilmar International Limited (Wilmar), has issued a profit warning based on unaudited 2Q16 results that the group is expected to report net losses of approximately USD230m for the quarter. This was largely due to: (i) weakness in the Oilseed and Grains (O&G) Manufacturing sub-segment on untimely soybean purchases and unexpected flooding in Argentina impacting soybean harvest, and (ii) Sugar business sustaining losses on delayed harvesting and lower cane crushing in Australia due to dry weather.

Negative near-term surprise. Although we noted the potential for weaker crush margins in the Oilseed and Grains (O&G) segment, the degree of loss comes as a negative surprise to us. However, management expects the operating environment to normalise in 2H16. While we agree with management’s assessment, we expect volatile commodity prices to persist in the mid-long term due to erratic weather and potential rate hikes in the US, which could extend Wilmar’s earnings risk.

Wilmar FY16-17E CNP cut by 14-4% to USD950m-1.14b as we reduce crush margins and sugar milling margins. As a result, PPB FY16-17E CNP is reduced by 10-3% to RM870m-RM1.01b.

PPB’s outlook unexciting. We are neutral on PPB’s own prospect, despite improving outlook on the Film segment due to new cinema openings and strong film line-ups. This is offset by weaker revenue in the Engineering segment due to lower order book, while Property sales will likely stay soft given its significant exposure to the weak Johor property market.

PPB downgraded to UNDERPERFORM with lower TP of RM15.50 (from RM16.60) post-earnings cut for lower average FY16- 17E EPS of 79.5 sen (from 85.1 sen). Our applied Fwd. PER is maintained at 19.5x based on 3-year historical mean, as PPB’s core business outlooks remain intact. However, we downgrade our call to UNDERPERFORM as Wilmar’s earnings risk is likely to weaken investor sentiment on PPB.

Source: Kenanga Research - 20 Jul 2016