Wilmar's 1H16 missed forecasts with CNP of USD2.1m below consensus (USD943m) and ours (USD950m) due to mistimed soy trades, delayed sugar harvest, and weak FFB production. Dividend of 2.5 US cents announced as expected. Post-production and margin revisions, Wilmar’s FY16-17E CNP reduced by 21-14% to USD754- 985m, which cuts PPB’s FY16-17E CNP by 15-10% to RM741-910m. UNDERPERFORM maintained with lower TP of RM15.00 (from RM15.50) after rolling forward to FY17E.

Quarterly loss. Wilmar’s 2Q16 core net loss (CNL) of USD220m led to 1H16 core net profit (CNP) of USD2.1m, falling far short of consensus’ USD943m CNP forecast and our USD950m forecast. This was largely due to poorly timed soybean purchases as well as delayed sugar harvest due to unfavourable weather. We also note the drought impact on palm oil production as 1H16 FFB volume fell 20% to 1.69m metric tons (MT), below our forecasted full-year drop of 7%.

Soy downer. The Oilseeds & Grains (O&G) segment dragged earnings with a 1H16 loss before tax (LBT) of USD175m (1H15: PBT of USD282m) and 2Q16 LBT of USD344m (2Q15: PBT of USD116m) due to mistimed soybean purchases in a volatile market. Although Tropical Oils (TO) 1H16 segment PBT improved 7% YoY to USD336m and 2Q16 PBT rose 25% QoQ to USD186m, this was largely driven by downstream improvement as 1H16 FFB production fell 20% YoY and weakened 13% QoQ due to drought impact. Sugar segment losses eased YoY from USD106m LBT to USD97m LBT, but worsened QoQ from USD18m LBT to USD79m LBT on delayed harvesting and accounting losses on higher sugar prices.

Palm improvement held back by droughts. Despite biodiesel purchase commitments by the Indonesian government and 1H16 CPO prices rising by 12% YoY, we note that YoY TO segment’s margins have increased by only 0.4% to 4.4% as weaker FFB production and fixed production costs resulted in poorer margins on the upstream side. Given the weaker YTD upstream performance, we reduce our FY16E FFB growth forecast to -15% from -7%, while FY17E growth is increased to +11% from +4% due to the low base effect.

Wilmar’s FY16-17E earnings reduced 21-14% to USD754-985m after reducing our FFB growth expectations and further cutting O&G and sugar margins. As a result, PPB’s FY16-17E CNP is reduced by 15-10% to RM741m-910m.

Maintain UNDERPERFORM with lower TP of RM15.00 as we roll forward our valuation base year to FY17E on EPS of 76.7 sen (previously average FY16-17E EPS of 79.5 sen). Our applied Fwd. PER is unchanged at 19.5x representing 3-year mean valuation, as PPB’s core business outlook remains neutral with improving Film prospect offset by weak Property sales and lower Engineering order book. Meanwhile, although we think the worst is over for Wilmar, setbacks from O&G segment and lacklustre FFB production dampen the group’s full-year outlook. As a result, we reiterate our UNDERPERFORM call on PPB.

Source: Kenanga Research - 12 Aug 2016