Wilmar’s 1Q19 CNP* of USD342m (+9% YoY; +43% QoQ) came within consensus estimate at 27%, and ours at 29%. The earnings improvement was driven by cheaper feedstocks in the TO segment but dampened by lower crush margins in the O&G division. No dividend, as expected. Trim PBB’s FY19-20E CNP by 3.1-1.6% to RM1.17-1.21b as we cut CPO price target to RM2,000-2,200/MT. Maintain UP with a lower TP of RM16.00.

Decent report card. Wilmar International (Wilmar)’s 1Q19 CNP* of USD342m (+9% YoY; +43% QoQ) came within expectations; at 27% of consensus full-year estimate and 29% of ours. 1Q19 FFB output of 905k MT (-8% YoY) was also broadly in line with our full-year estimate of 4.32m MT (+5% YoY) at 21%, as production usually picks up in the 2H. No dividend was declared during the quarter, as expected.

Downstream saved the day. YoY, the 9% improvement in 1Q19 CNP to USD342m was largely driven by the Tropical Oils (TO) segment. Despite a price-driven revenue drop of 13% in the TO segment, PBT soared 81% on higher sales volume (+8%) and cheaper feedstock, augmenting PBT margin from 2.3% in 1Q18 to 4.8% this quarter. However, its Oilseeds and Grains (O&G) segment registered a 47% drop in PBT, which resulted from lower sales volume (-4%) and dented soybean crush margins amid the African swine fever outbreak in China. QoQ, the 43% increase in 1Q19 CNP was also driven by the TO segment (PBT: +37%) but dampened by the O&G division (PBT: -21%), mostly on the same reasons.

Earnings to improve further sequentially. Moving into 2Q19, we believe Wilmar’s earnings could see further improvement on stronger O&G performance. We believe crush margins will improve in 2Q19 as the adverse effect of the African swine fever outbreak subsides. Additionally, Brazilian soybean crops have entered the main harvesting month in March, replenishing soybean supply and easing prices, which also bodes well for crush margins. In the TO segment, earnings could soften marginally as CPO prices have trended down since mid-Feb. Fortunately, the group has locked in feedstocks (CPO & PK) at low prices during 4Q18 as hinted by management earlier (likely even lower than current levels), though details regarding the hedging terms/duration were not disclosed. This should keep the segment’s processing margins relatively stable.

Trim Wilmar’s FY19-20E CNPs by 4.5-2.3% to USD1.13-1.15b and consequently PPB’s by 3.1-1.6% to RM1.17-1.21b as we cut CPO price target from RM2,400-2,400/MT to RM2,000-2,200/MT. We are also in the midst of reviewing our calls and TPs for other planters under our coverage.

Maintain UNDERPERFORM on PPB with a lower Target Price of RM16.00 (previously RM16.60) based on joint Sum-of-Parts between PPB and Wilmar. We value its Grains & Consumer Products segment at 21.7x PER representing a 30% discount to QL Resources’ 3-year Fwd. PER of 31.0x; Palm Plantation segment at 24.7x PER, reflecting its FY19E FFB growth of 5% and large-cap and FBMKLCI component statuses; Film segment at 20.0x PER, in line with Consumer Retail peers; Sugar at 18.0x PER, in line with MSM’s valuation, and other segments at book value. Our TP implies FY19E PER of 19.5x (historical mean), while the stock is currently trading at 22.7x (+2.0 SD). As the valuation appears overstretched, we recommend investors to take profit.

Risks to our call include: (i) better-than-expected crush/refining margins, (ii) stronger-than-expected sales volume, and (iii) stronger- than-expected consumer demand.

* Wilmar’s 1Q19 CNP excludes one-off items i.e. gain on disposal of investment in associates (USD2.3m), fair value gain arising from changes of interest in an associate (USD0.9m), gain on PPE disposal (USD0.3m), net fair value (gain)/loss on investment securities (USD19.3m) and FX translation losses (USD95.3m).

Source: Kenanga Research - 13 May 2019