9M18 core earnings of RM846.5m (+9%) and absence of dividends came within expectations. Top-line could continue to expand but may see some cost pressures, particularly with volatile commodity prices affecting the group’s grain business. Medium-term outlook likely intact with continued focus in sustaining other operations. Maintain OUTPERFORM on with an unchanged TP of RM18.35.

9M18 broadly within. 9M18 core net profit of RM846.5m accounted for 85% and 86% of our and consensus full-year estimates. We deem this to be broadly within estimates as we anticipate a weaker 4Q18 period mainly from the grains and agribusiness with the rise in inputs costs. No dividend was declared, as expected.

YoY, 9M18 revenue grew by 6% to RM3.36b, led by better performance from: (i) the grains & agribusiness (+4%) with higher volume sales across all flour mills, and (ii) environmental engineering & utilities (+120%) from higher recognition of project works. However, coincidedly, PBT contributions from the grains & agribusiness contributions diminished by c.18% as margins were compressed by higher raw material costs. This was offset by higher gains from Wilmar (+8%) of RM682.0m. Overall, core PATAMI closed at RM846.5m (+9%).

QoQ, 3Q18 top-line registered at RM1.14b (+5%) thanks to the same better performance from the grains & agribusiness (+7%) whilst other segments saw flattish results. Similarly, 3Q18 core PATAMI’s growth of 17% was mainly due to better contributions from Wilmar (+33%) while being offset by declining profit from the grains & agribusiness (-48%).

Some resistance ahead. The key grain business is expected to helm the group’s sales with the increase in demand, particularly in fulfilling the demand of regional food manufacturers. However, volatile commodity prices could spell trouble for operation in a sustainable margin environment. Still, we believe the group would not neglect its other key businesses, with continual efforts in place to ensure the growth and sustainability of its consumer products, film exhibition and distribution, environmental engineering and utilities as well as property segments. However, Wilmar’s contributions may take a break in the short term lieu of the poorer crush margins in its China operations.

Post-results, we leave our FY18E/FY19E assumptions unchanged.

Reiterate OUTPERFORM on PPB with an unchanged TP of RM18.35 based on the joint Sum-of-Parts between PPB and Wilmar. Base year is an unchanged at the average of FY18-19E. We value our Grains & Consumer Products segment at 22.5x; Palm Plantation segment at 23.2x, or in line with the large-cap plantation average; Film segment at 20.0x, or in line with Consumer Retail peers; Sugar at 18.0x, in line with MSM’s valuation, and other segments at book value. PPB is currently trading at +2.0SD above its historical mean, but we still reckon it is undervalued given its substantial discount against QL’s Fwd. PER of 50.0x. 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’s management has indicated the likelihood of a special dividend pay-out post listing.

Risks to our call include: (i) weaker-than-expected crush margin, (ii) persistently unfavourable commodity price trends, and (iii) lower-than- expected biodiesel quota volumes.

Source: Kenanga Research - 28 Nov 2018