PPB Group Berhad (PPB)’s associate Wilmar International Limited (Wilmar) FY17 CNP at USD1.05b came in within both consensus and our forecast at 98% and 95%, respectively. A final dividend of SGD¢7.0 was declared for full-year dividends of SGD¢10.0, in line with our SGD¢9.3 estimate. We update PPB’s FY17E CNP by +7% to RM1.17b, reflecting Wilmar’s full-year result. Maintain OUTPERFORM on PPB with higher TP of RM19.25.

FY18E within expectations. Wilmar FY17 CNP of USD1.05b was within both consensus USD1.06b and our USD1.10b forecast at 98% and 95%, respectively. FFB production at 3.92m metric tons (MT) is in line at 95% of our 4.14m forecast. A final dividend of SGD¢7.0 was declared, bringing full-year dividends to SGD¢10.0, which we deem in line with our SGD¢9.3 estimate.

Supported by Oilseed & Grains. YoY, FY17 CNP improved 7% largely on Oilseeds & Grains (O&G) segment PBT jumping 1.9x on solid crush margins and strong soy demand which boosted manufacturing volumes by 16% to 27.9m MT. Other segments were lacklustre, with Tropical Oils (TO) PBT declining 38% on thinner downstream margins due to lower biodiesel quotas from the Indonesian government. Sugar segment saw a reversal into loss before tax (LBT) of USD25m due to a shift in strategy to market more sugar products in 1H18. QoQ, CNP improved 16% on better TO PBT (+26%) as margins improved on better downstream sales volumes (+5% to 6.0m MT). However, O&G contribution weakened 19% as consumer demand slowed 11% to 1.4m MT after the customary festival period. Sugar PBT also softened 45% on the aforementioned shift in sales strategy.

China restructuring completed. Management noted that the internal restructuring of its China operations, with a view to a possible separate listing, has been largely completed, albeit with the proposed listing still at an evaluation stage. We opine that the move would be beneficial to PPB with its 18.6% associate stake, as the listing of Wilmar’s Chinese assets, with their USD6.43b book value, could, for instance, pave the way for a special dividend distribution among other possibilities. As for other businesses, we expect the TO segment to continue seeing gradual improvement on post-drought yield recovery across the region. Meanwhile, Sugar segment earnings may turn less volatile in 1H18, should the new marketing strategy pan out, as historically the Sugar segment tends to see losses in its 1H due to scheduled plant closures.

Upgrade PPB’s FY17E CNP to RM1.17b as we account for Wilmar’s increased FY17 net profit. Other estimates are unchanged, as Wilmar CNP came in within expectations.

Maintain OUTPERFORM on PPB with higher TP of RM19.25 (from RM19.00) as we roll forward our valuation base year to average FY18- 19E (from FY18E) for higher applied EPS of 100.3 sen (from 99.1 sen) and unchanged Fwd. PER of 19.2x. While 1H earnings tend to be softer for PPB due to Wilmar’s seasonal plant closures, its new marketing strategy for the Sugar segment may partly ease the volatility. Meanwhile, the proposed China listing should boost investor sentiment and potentially benefit PPB as a shareholder. As for PPB’s own businesses, we remain short-term positive on expansions and new launches in PPB’s own Film, Grains and Property segments.

Risks to our call include weaker-than-expected crush margin, higher- than-expected Sugar cost and lower-than-expected biodiesel quota volumes.

Source: Kenanga Research - 23 Feb 2018