Wilmar’s 9M16 CNP at USD387m made up 45% of consensus’ USD855m and 51% of our USD754m forecast due to significant losses in 2Q16. We deem this broadly within expectations as we expect strong 4Q16 numbers to make up for 1H16 weakness. No dividend, as expected. Maintain Wilmar FY16-17E CNP at USD754-985m as well as PPB FY16-17E CNP of RM741-910m. Maintain UNDERPERFORM on PPB with unchanged TP of RM15.00.

Strong 3Q16 recovery. Wilmar’s 3Q16 Core Net Profit (CNP*) saw a rebound to USD385m for 9M16 CNP of USD387m. This fell far short of consensus’ USD855m and our USD754m estimate at 45% and 51%, respectively, largely on the back of USD220m Core Net Loss (CNL) in 2Q16 due to poorly timed soybean purchases and delayed sugar harvest. However, we deem the results broadly within expectations as we expect strong 4Q16 earnings to offset 1H16 weakness. 9M16 FFB production was in line, coming in at 2.61m MT (- 20% YoY) or 70% of our full-year forecast.

Soy-based rebound. YoY-YTD, CNP halved as Oilseeds & Grains (O&G) PBT was 86% lower due to poor trades in 2Q16. This was partly offset by stronger Tropical Oils (TO) performance (+20%) due to better downstream margins. Sugar saw losses on setbacks from a weak 1H16. Other businesses saw a reversal to USD68m PBT on shipping and fertiliser segment improvements. QoQ, CNP reversed to USD385m as O&G PBT soared to USD248m from a 2Q15 LBT of USD344m on strong performance in its crushing businesses. Sugar segment also saw a positive reversal on better sugar prices. The TO segment PBT weakened 9%, likely on lower biodiesel sales and lacklustre FFB production.

Continued strength in 4Q16 priced in. We expect Wilmar to sustain its earnings strength in 4Q16, in line with previous trends. O&G segment should see decent crush margins on soybean oil and meal price resilience, while TO performance should see some benefits from the recently announced Indonesian biodiesel quotas for Nov 2016 to Apr 2017. However, we note that strong 2H16 earnings performance has already been priced into our full-year estimates, which remain unchanged.

FY16-17E CNP maintained at USD754-985m while PPB CNP unchanged at RM741-910m, as noted above.

Reiterate UNDERPERFORM on PPB with unchanged TP of RM15.00 based on 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. Meanwhile, we believe the strong earnings recovery in 2H16 has already been priced in, based on consensus earnings figures of USD855m. With Wilmar earnings historically making up 65-75% of PPB’s earnings, we believe the stock is fully valued and thus maintain our UNDERPERFORM call on PPB.

Source: Kenanga Research - 11 Nov 2016