We attended Wilmar’s 1H16 Analysts’ Briefing which was well attended by c.50 participants and returned maintaining our bearish view on the group’s full-year prospects. Our UNDERPERFORM call on PPB is maintained as Wilmar’s substantial 2Q16 trading losses and subdued outlook in other segments dampen full-year prospects. PPB’s TP is unchanged at RM15.00 based on Fwd. PER of 19.5x on FY17E EPS of 76.7 sen.

Oilseed and Grains losses a one-off. At the 1H16 Analysts’ Briefing, Wilmar International Ltd. (Wilmar) management highlighted that the realised losses seen in its Oilseeds and Grains (O&G) segment was due to mistimed soybean purchases in a volatile market environment. They stressed that the losses were one-off and should not repeat once changes are made to its risk management processes. We also note that historically Wilmar’s O&G segment tends to outperform in the 2H over 1H, with 2H PBT making up 59-84% of full-year PBT. However, given the degree of losses suffered in 2Q16, we expect Wilmar’s O&G segment to be only marginally profitable by year-end.

Subdued Plantation performance. Despite stronger performance in Wilmar’s palm downstream businesses, particularly from the biodiesel, oleo-chemical and specialty fats businesses, we gather that the company expects limited improvement from its year-to-date FFB production decline of 20%. This is in line with our FY16E FFB production forecast of - 15%. With our expectation of softer 2H16 CPO prices, we think 2H16 Tropical Oils segment performance is unlikely to see strong improvement against 1H16.

Weaker Sugar production outlook. Management also noted that with abnormal weather causing delays to sugar harvesting and reducing cane sugar content, they expect sugar production to decline by c.2% in 2016. We think this weakens the prospect for 2H16, although we expect a return to profitability in line with seasonal and historical trends.

Maintain UNDERPERFORM on PPB with TP unchanged at RM15.00. Our TP is based on a Fwd. PER of 19.5x applied to FY17E EPS of 76.7 sen. Our 19.5x Fwd. PER is based on the 3-year historical mean PER as our neutral outlook on PPB’s core businesses is unchanged. For Wilmar, although we expect a turnaround in 2H16, the substantial 2Q16 O&G losses and subdued outlook in other segments dampen full-year earnings prospects. With Wilmar earnings historically making up 65-75% of PPB’s earnings, we reiterate our UNDERPERFORM call on PPB.

Source: Kenanga Research - 15 Aug 2016