PPB Group Berhad (PPB)’s associate Wilmar International Limited (Wilmar) recorded 1Q18 CNP of USD315m, within consensus and our forecast at 26% and 27%, respectively. No dividend was announced, as expected. Maintain Wilmar’s FY18-19E CNP at USD1.18-1.19b, and PPB’s CNP at RM1.22-1.23b. Maintain OUTPERFORM on PPB with unchanged TP of RM22.60 (ex-bonus TP of RM18.83).

1Q18 meets estimates. Wilmar’s 1Q18 CNP at USD315m is within expectations at 26% of consensus’ USD1.19b forecast and 27% of our USD1.17b estimate. FFB production at 985k metric tons (MT) is also in line at 23% of our 4.32m MT estimate. No dividend was announced, as expected. Note that our core net profit calculation excludes fairly significant forex translation gains of USD113m.

Steady volumes. YoY, PBT declined 29% on lower Tropical Oils (TO) contribution (-34%) on weaker CPO prices and thinner downstream margins, likely due to the slow pace of Indonesian biodiesel contracts. FFB production saw improvement of 5% while manufacturing volumes increased slightly (+1% to 5.73m MT). Oilseed & Grains (O&G) PBT declined 17% despite stronger volumes in its manufacturing (+27% to 7.24m MT) and consumer products (+14% to 1.62m MT) businesses, likely on slimmer crush margins. Its Others segment saw weaker contribution (-49%) on lower investment gains. QoQ, Sugar business saw losses of USD39m as its new marketing program is scheduled to contribute from 2Q onwards. O&G performance weakened 16% on thinner manufacturing volume (-8%) and lower crush margins, despite improved consumer product sales (+19%) on Lunar New Year festivals.

Tariff volatility. Management noted that the prospect of Chinese tariffs on US soybeans “will result in soybean prices staying volatile for the coming quarters”, although this should not have a short-term impact given their forward buying strategy. However, plant utilization could be affected if this is prolonged. Nevertheless, management noted that better flour and rice business performance should partly mitigate the risk. Meanwhile, Tropical Oils should see improvement with yields to improve, likely lower manufacturing input cost, and stronger biodiesel demand given the crude oil price recovery.

Maintain PPB’s FY18-19E CNP at RM1.22-1.23b and Wilmar’s FY18- 19E CNP of USD1.18-1.19b as Wilmar’s earnings are in line with our forecast.

Reiterate OUTPERFORM on PPB with unchanged TP of RM22.60 (ex-bonus RM18.83) based on unchanged joint Sum-of-Parts between PPB and Wilmar. Base year is unchanged at the average of FY18-19E. We value our Grains & Consumer Products segment at 22.5x representing a 10% discount to QL’s Fwd. PER of 25.0x; Palm Plantation segment at 25.5x, or in line with the large-cap plantation average; Film segment at 22.0x, or in line with Consumer Retail peers; Sugar at 18.0x, in line with MSM valuation, and other segments at book value. Maintain as Top Pick - with PPB’s recently announced 1-for-5 bonus issue improving liquidity, we continue to like the stock for its attractive valuation of 1.0x PBV against its associate Wilmar with 1.2x PBV, as well as its own business expansions in its flour milling, cinema and property segments. Investors’ interest should be maintained with its substantial China business listing scheduled for 2H19.

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

* Wilmar’s 1Q18 CNP excludes one-off items such as disposal gain (USD1.6m) and forex translation gain (USD113.0m).

Source: Kenanga Research - 14 May 2018