Wilmar’s 9M18 CNP came in below expectations at USD734m (+8.9% YoY), accounting for 64% of both consensus’ and our estimates. YoY, 3Q18 CNP was flat as better earnings in Tropical Oils and Oilseeds & Grains segments were offset by a loss in the Others division. QoQ, 3Q18 CNP surged 3.4x as sugar crushing commenced in June. Trim Wilmar’s FY18-19E CNPs by 14.0%/2.2% to USD985-1.18b, and PPB’s by 9.7%/1.5% to RM1.00-1.18b postearnings miss. Maintain OUTPERFORM on PPB with lower TP of RM18.35 (from RM18.50).

9M18 missed estimates. PPB Group (PPB)’s associate Wilmar International (Wilmar) recorded 9M18 CNP of USD734m (+8.9% YoY), falling below expectations at 64% of both consensus’ and our forecast of USD1.15b due to lower-than-expected crush margin. The Oilseeds & Grains (O&G) segment registered a PBT margin of 4.5% in 9M18 vs. our previous assumption of 5.5%. Note that, among others, we have excluded a FX translation gain of USD110m from our 9M18 CNP. 9M18 FFB production of 3.18m MT (+6.1% YoY) was in line at 77% of our 4.13m MT estimate. No dividend was declared, as expected.

Higher sales volume. YoY, 3Q18 CNP of USD323m was flat. PBT of the Tropical Oils (TO) division surged 93.0% to USD155m on cheaper feedstock (mainly CPO and PK) and higher sales volume (+8.8% to 6.3m MT), fuelled by increased biodiesel blending and other downstream products. Meanwhile, the O&G segment also posted an encouraging PBT of USD297m (+17.4%) on the back of strong crush margins coupled with higher sales volume (Manufacturing: +11.7%; Consumer Products: +6.9%). However, the improvements were offset by poorer performance in the Others segment, which turned from a PBT of USD56m to a loss before tax (LBT) of USD7m. QoQ, 3Q18 CNP surged 3.4x mainly due to the commencement of sugar crushing season in June. As a result, the Sugar segment reversed from a LBT of USD46m to a PBT of USD76m. The TO and O&G segments were relatively flat from 2Q18.

Weaker crush margins to drag earnings temporarily. Moving into 4Q18, we believe Wilmar’s earnings would see a sequential decline as higher South American soybean prices narrow crush margins in China lately. We note that the higher soybean prices likely coincide with a low production season in South America. Therefore, we believe an earnings drag in 4Q18, if any, is temporary as crush margins are expected to normalise along with easing soybean prices when production reignites post-December.

Trim PPB’s FY18/19E CNPs by 9.7%/1.5% to RM1.00/1.18b as we lower Wilmar’s CNPs during the same periods by 14.0%/2.2% to USD985m-1.18b following the earnings miss.

Reiterate OUTPERFORM on PPB with a lower TP of RM18.35 (from RM18.60) based on joint Sum-of-Parts between PPB and Wilmar. Base year is unchanged at FY19E. We value our Grains & Consumer Products segment at 22.5x representing a 10% discount to QL Fwd. PER of 25.0x; Palm Plantation segment at 23.2x, based on its FY19E FFB growth prospect of 5% and its large-cap and FBMKLCI component status; Film segment at 22.0x, in line with Consumer Retail peers; Sugar at 18.0x, in line with MSM’s 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 pay-out post listing.

* Wilmar’s 9M18 CNP excludes one-off items such as a net disposal gain (USD1.4m), and forex translation gain (USD110.2m).

Source: Kenanga Research - 13 Nov 2018