FY18 core PATAMI of RM926.6m (-11%) is as expected, but full-year dividends of 28.0 sen were above our forecast. Revenue performance looks to expand further but profitability is undermined by volatile commodity prices, particularly on the group’s grain business. Maintain UNDERPERFORM and TP of RM16.60 based on SoP valuations.

FY18 within. FY18 core PATAMI of RM926.6m is within expectations, at 98% of our full-year estimate. No consensus numbers were available. The final dividend of 20.0 sen is above our expectation, amounting to a full-year payment of 28.0 sen (FY17 paid 30.0 sen). We had anticipated a payment of 25.0 sen, based on a c.30% payout ratio.

YoY, FY18 revenue increased by 6% to RM4.53b, mainly on the back of better sales from: (i) the grains & agribusiness (+5%) with higher sales volume across all flour mills, (ii) film exhibition & distribution (+12%) with more screens and strong title releases, and (iii) environmental engineering & utilities (+57%) on higher recognition of project works. However, the lower margins from the grains & agribusiness as well as consumer products segments, owing to higher raw material costs, eroded profit growth across all other segments. This led PBT to decline by 8% with thinner margins of 25.8% (-3.9ppt). Associate contribution from Wilmar was also weaker at RM837.7m (-13%) owing to lower soybean crush margins. Overall, FY18 registered a core PATAMI of RM926.6m (- 11%) after adjustments for gains/losses from forex and derivatives.

QoQ, 4Q18 revenue tipped up slightly to RM1.16b (+2%) from a recovery in the grains & agribusiness segment (+6%). Despite the group seeing better overall operating margins at 7.1% (+2.2ppt), core PATAMI fell by 41% mainly due to weaker contributions from Wilmar (-49%).

Volatile commodities linger. The group’s Grains & Agribusiness segment continued to support regional food manufacturers, but fail to capitalise on its larger share due to higher underlying wheat prices. This could have also affected the consumer products segment which was also dented by softer consumer spending. Wilmar is expected to see pressures from lower crush margins but could be poised to recover if better harvest seasons in 2H add to global supply and ease prices. Still, favourable traction is seen from efforts to improve the film exhibition & distribution, environmental engineering & utilities, as well as property segments in terms of top-line and bottom-line results.

Post-results, we slightly tweak our FY19E earnings by -0.2% as we incorporate FY18 results. We also introduce our FY20E numbers.

Maintain UNDERPERFORM with an unchanged TP of RM16.60 based on joint Sum-of-Parts between PPB and Wilmar. Valuation base year is also kept 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 22.2x (+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 re-look our valuation basis with an upward bias pending more details.

Risks to our call include: (i) better-than-expected crush margin, (ii) more favourable commodity price trends, (iii) higher-thanexpected biodiesel quota volumes, and (iv) better-than-expected consumer demand.

Source: Kenanga Research - 1 Mar 2019