Wilmar’s 1H17 CNP of USD451m came in below expectations, at 41% of our forecast and 36% of consensus due to weaker-than-expected Tropical Oils performance and wider Sugar segment losses. An interim dividend of SGD¢3.0 was declared, which we deem in-line given historically higher dividend in 2H. Reduce Wilmar’s FY17- 18E CNP by 8-10% and PPB CNP by 6-7%. Maintain OUTPERFORM with TP trimmed to RM18.90 (from RM19.35) on earnings downgrade

1H17 misses expectations. Wilmar International Limited (Wilmar) 1H17 Core Net Profit (CNP*) at USD451m missed both consensus (USD1.24b) and our forecast (USD1.11b) at 36% and 41%, respectively, as Tropical Oils (TO) underperformed (-29% PBT YoY) in the downstream segment on higher input cost, while Sugar segment saw higher losses (+46%) on volatility in its refining business. An interim dividend of SGD¢3.0 was declared, which we deem broadly in line given historically higher dividend in 2H.

Oilseed & Grains (O&G) reversal. YoY, CNP jumped sharply from only USD2m to USD451m as the O&G segment saw a reversal into PBT of USD275m on the back of positive crush margins, from a severe 1H16 loss of USD175m due to one-off derivatives losses. However, TO segment saw some weakness (-29%), which we believe was due to higher input cost in the downstream segment in view of high CPO and PK prices. Sugar losses widened from USD97m to USD141m on continued plant maintenance, compounded by volatility in the refining business and thinner merchandising margins. QoQ, CNP dropped 52% to USD146m as O&G PBT fell 71% on seasonally weaker consumer volumes and thinner crush margins, while TO contribution also weakened by 67% on weaker downstream performance, which failed to offset 10% higher FFB production to 1.03m MT.

Waiting on China plans. Recall that in its previous results announcement, Wilmar had mentioned a “internal restructuring of its China operations with the possibility of a separate listing”. While no update was given on Wilmar’s China plans, we believe a listing could prove positive for its shareholder PPB considering its 18.6% stake. Meanwhile, management appears more optimistic in 2H18, with positive crush margins expected for O&G and a better TO outlook thanks to improvements in production yield and better margins from downstream operations due to a softer CPO price outlook.

Reduce Wilmar’s FY17-18E CNP by 8-9% to USD1.02-1.17b as we tweak down our margin assumptions in the TO downstream sub segment and reduce Sugar earnings expectations given higher-than expected 1H17 operating costs. PPB FY17-18E CNPs are, likewise, downgraded by 6-7% to RM1.03-1.17b.

Maintain OUTPERFORM on PPB with lower TP of RM18.90 (from RM19.35) based on an updated Fwd. PER of 19.2x (from 19.5x) while we roll forward our valuation base year to FY18E (from average FY17- 18E) for the lower applied EPS of 98.6 sen (from 99.2 sen). Our updated Fwd. PER of 19.2x is based on an unchanged 3-year historical mean PER as we are overall neutral on both PPB and Wilmar’s core business outlooks. We believe fresh news on Wilmar’s proposed China restructuring should prove positive for investor sentiment, while PPB as a shareholder may well reap additional rewards from a possible China spin-off.

Source: Kenanga Research - 11 Aug 2017