2Q19 CNP* came in broadly within expectations at USD111m (+16% YoY; -68% QoQ), bringing 1H19 CNP to USD453m (+10% YoY), forming 38% of consensus full-year estimate and 40% of ours. Earnings are expected to pick up in 2H19 as sugar crushing season commences in Australia. An interim dividend of SGD0.03 was declared, as expected. No changes in Wilmar’s FY19-20E CNP of USD1.13-1.15b and PPB’s RM1.17-1.22b. Maintain UP with an unchanged TP of RM16.00.

Broadly within expectations. Wilmar International (Wilmar)’s 2Q19 CNP* came in broadly within expectations at USD111m (+16% YoY; - 68% QoQ). This brought 1H19 CNP to USD453m (+10% YoY), accounting for 38% of consensus full-year estimate and 40% of ours. 2H is usually stronger with the commencement of sugar crushing season in Australia. As a historical check, 1H profits in the past 5 years constituted 31-42% of full-year earnings (except for 1H16, which posted extremely poor performance amid highly volatile soybeans market). 1H19 FFB output of 1.9m MT (-8% YoY) was also broadly in line with our full-year estimate of 4.3m MT (+5% YoY) at 45%, as production usually picks up in the 2H. An interim dividend of SGD0.03 was declared during the quarter, as expected.

Downstream to the rescue. YoY, the 10% improvement in 1H19 CNP to USD453m was largely driven by the Tropical Oils (TO) segment. Despite a price-driven revenue drop of 13% in the TO segment, PBT soared 41% on higher sales volume (+9%) and cheaper feedstock, augmenting PBT margin from 3.0% in 1H18 to 4.8% in 1H19. However, its Oilseeds and Grains (O&G) segment registered a 68% drop in PBT, which resulted from dented soybean crush margins amid the African swine fever outbreak in China and marginally lower sales volume (- 1%). QoQ, the group posted a drastic 68% drop in 2Q19 CNP mainly due to USD69m pretax loss in the Sugar segment vs. USD2m PBT in 1Q19 – the last crushing season in India began in October 2018 and ended in April 2019. The O&G segment saw a 35% decline in PBT as soybeans crushing operations continued to be affected by the African swine fever.

Earnings to improve in 2H19. We expect Wilmar’s earnings to pick up in 2H19 mainly due to the commencement of sugar crushing season (June to November) in Australia. Additionally, we see a potential recovery in the soybeans crush margins in 2H19 as the adverse effect of the African swine fever outbreak subsides, boding well for the O&G segment. In the TO segment, earnings should remain stable as we gather that the group has already locked in feedstock at lower prices, keeping processing margins in check.

Maintain Wilmar’s FY19-20E CNP of USD1.13-1.15b and PPB’s RM1.17-1.22b as earnings were in line with expectations.

Maintain UNDERPERFORM on PPB with an unchanged Target Price of RM16.00 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 FY20E PER of 18.7x, while the stock is currently trading at 21.7x (+1.0SD). As the valuation appears overstretched, with positives likely more than priced in, we maintain our UP call on PPB.

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.

Source: Kenanga Research - 15 Aug 2019