Kenanga Research & Investment

PPB Group Berhad - Soft Patch to Continue for Wilmar

kiasutrader
Publish date: Fri, 22 Feb 2019, 10:59 AM

FY18 CNP declined 24% YoY to USD973m, spot-on with our forecast but missed consensus estimate at 81%. YoY, 4Q18 CNP plummeted 49% to USD239m due to losses in a new Sugar subsidiary and lower soybean crush margins. QoQ, CNP fell 26% on the same reasons. A final dividend of SGD¢7.0 was declared, bringing full-year dividend to SGD¢10.5, above our expectation. Fine-tune PPB’s FY18-19E CNPs by 0.5-0.1% to RM948m-1.20b due to housekeeping reasons. Downgrade to UP with unchanged TP of RM16.60.

Within our expectation but missed street’s. Wilmar International (Wilmar)’s FY18 CNP declined 24% YoY to USD973m, spot-on with our forecast but missed consensus estimate at only 81%, likely due to lower-than-expected soybean crush margins arising from lower meal demand amid an African swine fever outbreak in China. FY18 FFB production of 4.19m MT (+6.8% YoY) was in line with our 4.13m MT estimate. A final dividend of SGD¢7.0 was declared, bringing full-year dividend to SGD¢10.5, exceeding our SGD¢9.2 expectation.

Plagued by soybean crush margins and sugar losses. YoY, 4Q18 CNP plummeted 49% to USD239m mainly due to a 44% dive in Oilseeds and Grains (O&G) PBT caused by lower soybean crush margins as noted. In addition, its Sugar segment PBT declined 66% (excluding goodwill impairment of USD139m) dragged by losses from the group’s newly acquired Indian subsidiary, Shree Renuka Sugars Limited (SRSL), which crushing activities only commenced in late- October 2018. These were partially mitigated by a 30% improvement in Tropical Oils (TO) PBT arising from stronger downstream performance, which was helped by cheaper feedstock and 10% growth in sales volume. QoQ, 4Q18 CNP fell 26% owing to same reasons noted above.

Earnings to soften further sequentially. Moving into 1Q19, despite the recovery in CPO prices, we believe Wilmar’s earnings would soften further on a sequential basis as soybean crush margins continue to be affected by muted meal demand again due to the African swine fever. In addition, its Sugar segment is likely to register losses as we enter low crushing season.

Fine-tune PPB’s FY18-19E CNPs by 0.5-0.1% to RM948m-1.20b due to housekeeping reasons.

Downgrade to UNDERPERFORM with an unchanged TP of RM16.60 based on joint Sum-of-Parts between PPB and Wilmar. Base year is unchanged at FY19E. We value our Grains & Consumer Products segment at 21.7x representing a 30% discount to QL Resources’ 3-year Fwd. PER of 31.0x; Palm Plantation segment at 24.7x, reflecting its FY19E FFB growth prospect of 5% and its large- cap and FBMKLCI component statuses; Film segment at 20.0x, in line with Consumer Retail peers; Sugar at 18.0x, in line with MSM’s valuation, and other segments at book value. Our TP implies FY19E PER of 19.6x (historical mean), while the stock is currently trading at 22.4x (+2.0 SD). As the group is likely to see softer fundamentals in the near term and valuation is expensive, we recommend investors to take profit. Meanwhile, we continue to monitor the upcoming listing of Wilmar’s China business (targeted for FY19-20), which could potentially benefit PPB with the possibility of special dividends being paid out by Wilmar post-listing.

Risks to our call include: (i) better-than-expected crush margins, (ii) strong commodity price trends that lead to higher overall profit, (iii) better-than-expected biodiesel quota volumes, and (iv) better-than- expected movement in consumer demand.

Source: Kenanga Research - 22 Feb 2019

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