We attended Wilmar’s FY17 Analysts’ Briefing which was well attended by c.50 participants and returned with an unchanged positive outlook on; (i) lower Sugar segment volatility (ii) Tropical Oils should see volume improvements, and (iii) Oilseed and Grains to maintain positive crush margins. Longer-term excitement should be seen on its China listing. No change to PPB’s FY17-18E CNP. Maintain OUTPERFORM and TP of RM19.25.

Oilseed and Grains maintaining margins. At the FY17 Analysts’ Briefing, Wilmar International Ltd. (Wilmar) management reiterated that its slower 4Q17 performance was due to the shift in Chinese festival timing and expect to see better consumer demand in 1Q18. They observed that Chinese crush margin should remain positive, supported by solid soymeal demand. For the longer run, management has completed its restructuring process at the holding level (which would not translate to added efficiency), paving the way for its listing some time in FY19, for which we expect to see a special dividend in c.FY19- 20, benefiting PPB.

Reducing Sugar volatility. As mentioned in our results note (published 23-Feb), Wilmar adjusted its marketing strategy to reserve its Sugar inventory for sale in 1H18, which should reduce the traditional 1H earnings volatility. Management also noted that 4Q17 segment losses were partly due to USD30m impairment on Australian sugar assets, excluding which the segment would have seen a minor profit of c.USD5m. Going forward, we turn more lukewarm on the sector, as management guided for stronger competition in Australia, and therefore, potentially lower margins, although the company expects to maintain profitability in the sector.

Tropical Oils volume to improve. The Tropical Oils segment saw weaker performance in 2017 on softer refining and biodiesel margins, possibly due to the lower biodiesel conversion factor of USD100/metric ton (MT) but flattish government-mandated volumes in the Nov 2017- Apr 2018 tender of 1.41m kiloliters (c.1.24m MT) vs. 1.37m kiloliters (c.1.21m MT) in the May 2017-Oct 2017 tender. With higher crude oil prices and a lower conversion factor, we are optimistic of higher volume mandates in the coming tender period which should lead to improvement for Wilmar’s biodiesel processing margins. Meanwhile, management commented that while palm oil bans may have limited price effect as demand between different oilseeds would shift accordingly, the bigger concern is any reduction in European biodiesel mandates, which would eliminate demand and thus lead to higher supply.

Maintain FY17-18E CNP at RM1.17-1.17b with no change to our view following the management briefing.

Reiterate OUTPERFORM on PPB with unchanged TP of RM19.25

based on unchanged Fwd. PER of 19.2x applied to average FY18-19E EPS of 100.3 sen. We expect lower share price volatility to follow on from reduced earnings volatility in the Sugar segment, while better Tropical Oils performance should support earnings in 2H18. Meanwhile, the proposed China listing, likely to result in a special dividend announcement, should keep share prices supported in the longer term. As for PPB’s own businesses, we remain short-term positive on expansions and new launches in the Film, Grains and Property segments. Risks to our call include weaker-than-expected crush margin, higherthan-expected Sugar cost and lower-than-expected biodiesel quota.

Source: Kenanga Research - 26 Feb 2018