Wilmar’s 1H18 CNP came in broadly within expectations at USD410m, accounting for 35% of both consensus and our estimates. An interim dividend of SGD¢3.5 was declared, in line with our expectation. Maintain Wilmar’s FY18-19E CNP at USD1.17- 1.19b, and PPB’s CNP at RM1.22-1.23b. Maintain OUTPERFORM on PPB with unchanged TP of RM18.60 (ex-bonus).

1H18 meets estimates. PPB Group (PPB)’s associate Wilmar International (Wilmar) recorded 1H18 CNP of USD410m, which was broadly in line with expectations at 35% of consensus’ USD1.16b forecast and our USD1.17b estimate. Historically, Wilmar’s earnings are stronger in the 2H, accounting for 60-70% of full-year CNP. Note that, among others, we have excluded a sizable FX translation gain of USD109m from our 1H18 CNP calculation. FFB production at 2.07m MT was also in line at 48% of our 4.32m MT estimate. An interim dividend of SGD¢3.5 was declared, in line with our expectation.

Hurt by low commodity prices. YoY, 1H18 CNP declined 5% on lower sales volume from Tropical Oils Manufacturing & Merchandising (-0.2%) and Sugar Merchandising, Refining & Consumer Products (- 12.4%). This was exacerbated by downward trending commodity prices in both the Tropical Oils and Sugar segments. In 1H18, CPO price was down 18% while raw sugar price tumbled 27%. Additionally, its Others segment saw a 90% plunge in PBT owing to poor performances of the group’s investment securities. However, this was partially offset by higher crush margins in the Oilseeds & Grains (O&G) division. QoQ, CNP declined 70% in 2Q18 due to the same reasons above. CPO price trended 4% lower while raw sugar price declined 12% in 2Q18.

Stronger 2H. Looking ahead, we believe Wilmar’s earnings in 2H18 would improve along with the gradual recovery in commodity prices. Recent developments in the palm oil industry are supportive of CPO prices – India’s recent move to raise import taxes on other vegetable oils and Indonesia’s push to make biodiesel (B20) compulsory for all vehicles and heavy machinery by next month. Earnings in the Sugar segment should also improve in 2H18 with the commencement of crushing season in June. Nevertheless, we note that a drawn-out trade spat between China and US could adversely affect crush margins in the O&G segment due to lower capacity utilisation.

Maintain PPB’s FY18-19E CNP at RM1.22-1.23b as Wilmar’s 1H18 earnings were broadly in line with our forecast.

Reiterate OUTPERFORM on PPB with unchanged TP of RM18.60 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. We reiterate our OUTPERFORM call on PPB with highlights including: (i) the group’s own earnings growth from expansions across its key segments, and (ii) the upcoming listing of Wilmar’s China business (targeted for FY19-20). The listing could potentially benefit PPB as Wilmar management has indicated the likelihood of a special dividend payout post listing.

Risks to our call include weaker-than-expected crush margin, a crash in commodity prices and lower-than-expected biodiesel quota volumes.

* Wilmar’s 1H18 CNP excludes one-off items such as a net disposal loss (USD0.5m), gain on bargain purchase on business combination (1.4m), FV loss from changes of interest in JV and forex translation gain (USD109.0m).

Source: Kenanga Research - 14 Aug 2018