Wilmar’s 1Q17 CNP at USD305m met expectations at 24% of consensus and 28% of our forecast. No dividend was announced, as expected. We revise up Wilmar’s FY17-18E CNP by 3-4% and PPB by 2-3%. Upgrade call to OUTPERFORM with a higher TP of RM19.35 post-earnings adjustment and we have rolled forward our base year to average FY17-18E. While core outlook is still neutral, expect positive investor sentiment on Wilmar’s potential China restructuring & listing.

1Q17 meets forecasts. Wilmar’s 1Q17 Core Net Profit (CNP*) at USD305m came in within expectations, at 24% of consensus’ USD1.26b and 28% of our USD1.08b forecast. No dividend was announced, as expected.

Solid Tropical Oils (TO) and O&G performance. YoY, CNP improved 37% on the back of 27% higher O&G PBT thanks to higher soybean crushing volume and stable margins. TO performance also rose 20% thanks to higher CPO prices (+30% to RM3,133/MT) and higher FFB production (+4% to 938.8k metric tons (MT)). The Sugar segment saw loss before tax (LBT) of USD34m in line with seasonal maintenance of Australian mills. Others segment also saw a 4.7x jump on better Shipping and Fertiliser earnings and investment gains.

QoQ, CNP fell 48% largely as Sugar segment reversed to losses on seasonal maintenance. This was partly offset by higher O&G PBT (+20%) on higher soybean volumes. TO PBT softened 3% as higher prices (+7%) failed to offset lower FFB volumes (-22%).

Chinese restructuring on the cards? Wilmar also announced that it is “carrying out an internal restructuring of its China operations with the possibility of a separate listing”. We gather that China is the largest single revenue source for Wilmar at USD19.98b or 48% of FY16 revenue. At a PBT level, assuming the bulk of its Oilseed and Grains (O&G) and Consumer segment revenues are derived from China, we estimate that China makes up 27% of PBT. As such, we believe the restructuring will have a significant impact on the group, and its listing could well be positive for shareholder PPB with its 18.6% stake, for example, if Wilmar rewards its shareholders with dividends from the listing.

Increase Wilmar’s FY17-18E CNP by 3-4% to USD1.11-1.29b as we adjust our O&G assumptions to reflect better volumes. PPB FY17-18E CNP is also upgraded by 2-3% to RM1.09-1.26b.

Upgrade PPB to OUTPERFORM (from MARKET PERFORM) on higher TP of RM19.35 (from RM17.60) based on unchanged Fwd. PER of 19.5x as we roll forward our valuation base year to average FY17-18E (from FY17E) for updated EPS of 99.2 sen (from 84.2 sen). Our Fwd. PER of 19.5x is based on 3-year historical mean PER as we are overall neutral on both PPB and Wilmar’s core business outlook. Although TO segment contribution should remain stable as better production offsets a softer CPO price outlook, Sugar earnings should remain soft in 2Q17 while O&G earnings could be at risk on potentially higher soybean crush margin volatility. However, in view of Wilmar’s proposed China restructuring, we think the positive investor sentiment could extend to both PPB and Wilmar, while PPB as a shareholder may well reap additional rewards from a possible listing. Thus, we upgrade our call on PPB to OUTPERFORM (from MARKET PERFORM)

Source: Kenanga Research - 12 May 2017