PPB Group Berhad (PPB)’s associate Wilmar International Limited (Wilmar) posted 9M17 Core Net Profit (CNP*) of USD851m, which is within consensus at 76% but above our forecast at 82% on better-than-expected Oilseeds & Grains (O&G) performance thanks to good volumes and margins. No dividend was announced, as expected. Upgrade PPB’s FY17-18E CNP by 5-2% on higher Wilmar’s CNP by 7-3%. Maintain OUTPERFORM with higher TP of RM19.00.

Wilmar 9M17 within consensus estimates. Wilmar recorded 9M17 CNP of USD851m, which came in within consensus expectation of USD1.12b at 76% and above our expected USD1.04b estimate at 82% thanks to better-than-expected Oilseed & Grains (O&G) performance on the back of positive crush margins. No dividend was announced, as expected.

Supported by soy. YoY, 9M17 CNP doubled (+1.2x) to USD851m on a sharp recovery in O&G PBT (+6.2x) thanks to positive crush margins and strong soybean crush volumes. This was partly offset by weaker Tropical Oils (TO) segment PBT (-36%) on softer downstream margins due to lower biodiesel allocations and volatile raw material prices. QoQ, 3Q17 CNP jumped 1.7x to USD399m with improvements across the board. O&G earnings tripled to USD254m on better crush volumes (+14%) and consumer product volume sales (+37%); Sugar PBT reversed to USD182m from a LBT of USD107m post the annual 1H maintenance, and TO earnings improved 40% on better mill volumes, in spite of flattish own FFB production at 1.03m metric tons (MT).

China excitement. We remain positive on Wilmar’s prospects going into 4Q17 as management expecting continued positive crush margins and good volume. Sugar business should continue to see positive 2H contributions, while we think the TO segment should see improvement on seasonally better production and CPO & PK price stability. Meanwhile, the spin-off of its China operations appears to be on track for a 2019 listing, which should give long-term investors something to look forward to in 2H18.

Up PPB’s FY17-18E CNP by 5-2% to RM1.09-1.17b as we increase our Wilmar’s forecast earnings by 7-3% to USD1.11-1.17b after upgrading O&G and Consumer earnings assumptions to reflect better volume performance.

Maintain OUTPERFORM on PPB with higher TP of RM19.00 (from RM18.65) based on unchanged Fwd. PER of 19.2x applied to higher FY18E EPS of 99.1 sen (from 97.1 sen). Our Fwd. PER of 19.2x is based on an unchanged 3-year historical mean as we are long-term neutral on PPB and Wilmar’s core business outlooks. We expect updates on Wilmar’s proposed China restructuring or listing to boost investor sentiment and potentially benefit PPB as a shareholder. Short- term outlook is positive given good O&G crush and positive Sugar prospects, but investors should keep in mind the seasonal 1H slowdown pattern due to maintenance activities heading into early 1Q18.

Source: Kenanga Research - 14 Nov 2017