PPB Group (PPB)’s 1H16 CNP at RM174m made up 19% of consensus and 24% of our forecast due to 2Q16 losses from Wilmar associate (USD220m CNL). We deem this broadly within expectations as we expect Wilmar to return to profitability in 2H16. DPS of 8.0 sen announced, in line with historical trends. We maintain our earnings estimates, as well as our UNDERPERFORM call and TP of RM15.00.

Broadly within expectations. 1H16 CNP at RM174m made up only 19% of consensus’ RM921m forecast and 24% of our RM741m forecast as PPB’s earnings were dragged by a Core Net Loss (CNL) of USD220m at its 18%-owned associate Wilmar. Note that ex-Wilmar EBIT at RM223m is in line at 52% of our expected RM429m. An interim dividend of 8.0 sen was declared, in line with previous years’ trends.

Grains segment recovery. YoY-Ytd, CNP dropped 58% as Wilmar contribution shrank 96% on losses in 2Q16 (please refer to our results and briefing reports dated 12-Aug and 15-Aug). However, PPB’s EBIT improved 25% as Grains and Agribusiness (Grains) earnings saw a 39% PBT increase due to a turnaround in its Indonesian milling business and favourable wheat prices. The Film Exhibition & Distribution (Film) segment’s PBT also improved 40% on new cinema openings and strong blockbuster titles released. QoQ saw a CNL of RM86m on Wilmar’s CNL of RM220m. However, EBIT climbed 45% as Grains' PBT jumped 86% on better flour sales volume in Vietnam and Indonesia. Property PBT also doubled (+118%) on land and building disposal (RM7.3m). Excluding the one-off disposal, Property PBT improved 44% to RM14m on higher progress billings for its Penang project. Meanwhile, Film PBT weakened 49% on lower blockbuster releases during the quarter.

Overall prospects weak on Wilmar losses. We remain neutral on PPB’s own operations prospect. For the Grains segment, although we note that wheat prices have fallen from its early-June peak of USD520/bushel (bu) to USD405/bu. Currently, management expects Grains' performance to be maintained in view of strong competition in its overseas markets. The Film segment should continue to see growth in its pipeline of new cinema openings and strong films line-up. However, the Environmental Engineering & Utilities (Engineering) segment is likely to see weaker performance on a declining order book, while the Property segment, excluding one-off disposals, is likely to remain soft due to weak local market sentiment. However, as PPB’s earnings are contingent on Wilmar’s performance, we expect earnings recovery only by year-end, given Wilmar’s 1H16 setback in its Oilseeds & Grains and Sugar businesses.

Maintain FY16-17E earnings at RM741-910m. No change to our earnings forecasts as we deem 1H16 results as in line with our estimates.

Maintain UNDERPERFORM with TP maintained at RM15.00 based on an unchanged Fwd. PER of 19.5x applied to FY17E EPS of 76.7 sen. Our applied Fwd. PER is unchanged at 19.5x representing 3-year mean valuation, as PPB’s core business’ outlook remains neutral with decent Film and Grains prospects offset by weak Property sales and lower Engineering order book. Meanwhile, although we think that the worst is over for Wilmar, we expect a slow recovery for both PPB and Wilmar given the substantial setbacks seen in 1H16.

Source: Kenanga Research - 26 Aug 2016