We attended Wilmar International (Wilmar)’s 4Q18 results briefing in The Fullerton Hotel, Singapore. We learned that its Tropical Oils segment is likely to perform well in 1Q19 as it has locked in cheap feedstocks earlier. However, soybean crush margins continue to be affected by the African swine fever, while Sugar segment enters a maintenance season. Overall, weaker 1Q19 earnings looms. Wilmar China’s listing remains intact. No changes in PPB’s FY18-19E CNPs. Maintain UP with unchanged TP of RM16.60.

Tropical Oils to do well on cheap feedstock. Management hinted that the company has locked in feedstocks (CPO & PK) at low prices since 4Q18, though details regarding the hedging terms/duration were not disclosed. This bodes well for its processing margins as selling prices have been trending up lately while some of its feedstock costs are fixed. As such, we believe the Tropical Oils (TO) would perform well in 1Q19.

Crush margins to stay weak. On the other hand, soybean crush margins have likely remained weak in recent months as the African swine fever outbreak in China continues to hurt feed meal demand. For this reason, we believe the Oilseeds & Grains (O&G) segment could hit a soft patch in 1Q19 with both lower volume and crush margins, but we do not expect losses. Nevertheless, the situation is likely to improve in 2Q19 when Brazilian soybean crops enter the main harvesting month in March, replenishing soybean supply and easing prices. This would likely widen crush margins again, though the significance of the impact would only be felt in 2Q19.

Overall earnings to soften sequentially. With Wilmar’s Sugar segment also entering a maintenance season (low crushing activities), we believe Wilmar’s overall 1Q19 earnings would soften further QoQ.

Wilmar China’s listing intact. Wilmar has recently converted its China holding company into a joint-stock company, preparing itself for a potential separate listing in China. Management explained that the main objective of the listing is to achieve higher market penetration into China’s huge consumer food market. The listing would position Wilmar as a local consumer food player, allowing it to expand more aggressively and possibly receive more favourable local support/treatment. Although no timeline was guided, we believe management would endeavour to expedite the process and actualise it by end-FY19 or early-FY20. We are positive on this as it potentially offers valuation boost for Wilmar, and special dividends for PPB Group – see overleaf.

No changes in FY18-19E CNPs of RM948m-1.20b as management’s updates are consistent with our expectations.

Maintain UNDERPERFORM on PPB 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. Note that our TP has not reflected the potential listing of Wilmar’s China business due to a lack of details and unknown timeline. We will relook our valuation basis with an upward bias pending more details.

Source: Kenanga Research - 25 Feb 2019