1H19 core PATAMI of RM407.3m (-20%) missed expectations, dragged by lower margins from Grains & Agribusiness. Declared dividend of 8.0 sen is within expectations. Despite the miss, we continue to expect Wilmar to see an earnings pickup in 2H19, coinciding with the sugar crushing season in Australia. Post-results, PPB’s FY19-20E earnings revised downwards by 4-3%. Maintain UP with lower SoP-driven TP of RM15.60 (from RM16.00).

Below expectations. 1H19 core PATAMI of RM407.3m came in below expectations, making up 35% each of our and consensus’ estimates. The deviation is largely due to poorer-than-expected Grains and Agribusiness earnings, which suffered from higher raw material cost. An interim dividend of 8.0 sen was declared, in-line with our expectation.

Poorer grains performance. YoY, 1H19 core PATAMI plunged 20%, largely dragged by lower contribution from Wilmar (-18%) as well as weaker earnings from Grains and Agribusiness (-14%). Higher raw material costs dented margins from the Grains and Agribusiness’ animal feed division despite an 11% overall growth in sales. This was slightly cushioned by improved earnings from Film Exhibition & Distribution (+34%) led by better-received CNY movies and local titles.

QoQ, similarly, 2Q19 core PATAMI plummeted 35% on the back of lower contribution from both Wilmar (-40%) and its Grains and Agribusiness (-58%) due to the aforementioned reasons.

Wilmar to improve in 2H19. Moving forward, we believe Grains & Agribusiness will remain muted on higher raw material costs compressing margin. On the flip side, we anticipate Wilmar’s earnings to pick up in 2H19, on the back of the commencement of sugar crushing season (June to Nov) in Australia coupled with a potential recovery in soybean crush margins, which bodes well for Wilmar’s Oilseed & Grain segment. The Film, Exhibition and Distribution segment is also likely to post better performance given the introduction of new cinematic technology, stronger movie line-ups and contribution from newly-opened cinemas in Malaysia in 2H. The environmental engineering & utilities segment previously guided order-book (c.RM320m) should keep the segment busy in the near-term. Further, new distribution agreements and a halal-certified frozen-food factory in 2Q19 could boost Consumer Products’ performance.

Post-results, we revised our FY19-20E earnings forecasts downwards by 4.4-3.3% after accounting for more conservative margins for Grains & Agribusiness.

Maintain UNDERPERFORM with a lower TP of RM15.60 (from RM16.00) based on joint Sum-of-Parts between PPB and Wilmar. We value 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 FY20E PER of 18.9x, while the stock is currently trading at 22.6x (+1.5 SD). 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 margin, (ii) more favourable commodity price trends, and (iii) stronger-thanexpected sales volume and consumer demand.

Source: Kenanga Research - 30 Aug 2019