We attended Wilmar?s FY16 Analysts? Briefing, which was well attended by c.50 participants and returned still short-term neutral as the bright Tropical Oils (TO) outlook is offset by seasonal Sugar maintenance in 1H17. Meanwhile, Oilseeds & Grains (O&G) growth may only be felt after 2017. No change to Wilmar and PPB?s earnings forecasts. Maintain MARKET PERFORM with unchanged TP of RM17.60.

Tropical Oils (TO) going strong in 1H17. Management expects FY17E production to improve by 5-10%, in line with our expected 9% growth rate. We think the TO segment should perform well in 1H17 on high CPO prices and the ongoing biodiesel contract, although 2H17 could moderate as volume growth results in softer CPO prices. On the biodiesel side, management noted that the Indonesian government could consider lowering the biodiesel subsidy margin from USD125/MT to USD100/MT as the high CPO price reduces the volume of CPO that can be subsidised. If so, the move would trim Wilmar?s downstream margins, though it could be supportive for CPO prices as a whole.

But Sugar to moderate in near-term. 4Q16 Sugar segment performed well due to extended cane crushing activity as a result of delayed harvesting due to poor weather in mid-2016. Mill businesses benefited from the increased volume coupled with high sugar prices. However, on the flip side, sugar refineries suffered on higher raw materials cost but sticky selling prices, thus, resulting in some impairment (USD34m) for the quarter. We gather that management has taken a conservative view in applying the impairment and do not expect further charges for now. Looking ahead, we expect the normal 1H17 Sugar slowdown as plants are closed for off-season maintenance. Note that Sugar segment has been loss making in 1H for the last 5 years, which dampens group performance in this period.

Long-term expansion in Oilseeds & Grains (O&G) and other businesses. O&G saw good 2H16 recovery from 2Q16 trading losses thanks to stable crushing margins and good consumer product volume growth. Management is positive on O&G prospects as China has lifted restrictions on foreign soy crushing and refining capacities. We gather that Wilmar plans to expand in China, which is long-term positive, though impact may only be felt after 2017. Meanwhile, management also mentioned that they are looking into JVs with other big-name MNCs along the lines of its Goodman Fielder JV, which bodes well for long-term JV & associate growth prospects.

Maintain Wilmar?s FY17-18E CNP in view of our recent earnings upgrade, with no major surprises from managements? comments. No change to PPB?s FY16-17E earnings.

Reiterate MARKET PERFORM on PPB with unchanged TP of RM17.60 based on Fwd. PER of 19.5x on FY17E EPS of 90.3 sen. We maintain our mean valuation basis, reflecting the neutral outlook in both PPB and Wilmar?s core businesses. We expect subdued investor interest for now, as 1H17 performance from Wilmar should be muted with better TO prospect offset by seasonally soft Sugar and O&G businesses.

Source: Kenanga Research - 22 Feb 2017