PPB’s 18.56% owned Wilmar’s 3QFY19 CNP* came in broadly within expectations, at USD303m (-6% YoY; +174% QoQ), bringing 9MFY19 CNP to USD756m (+3% YoY), at 66%/67% of our/consensus estimates. 4QFY19 earnings are expected to improve sequentially, riding on the sugar crushing season in Australia and improvement in soybean crush margins and volume. Trim Wilmar’s FY19-20E CNP by 1.9-1.0% and PPB’s by 1.4-0.7% on lower FY19-20E FFB output (-7%/-3%). Maintain UP with a lower TP of RM16.30.

Broadly within expectations. PPB’s 18.56% owned Wilmar International (Wilmar)’s 3QFY19 CNP* came in broadly within expectations at USD303m (-6% YoY; +174% QoQ), bringing 9MFY19 CNP to USD756m (+3% YoY), accounting for 66%/67% of our/consensus estimates, respectively. 4QFY is usually the strongest on the back of sugar crushing season in Australia. As a historical check, 9MFY profits for the past 5 years (except 9MFY16) constituted 64%-75% of full-year earnings. However, 9MFY19 FFB output of 2.95m MT (-7% YoY) came in below our FY19 forecast of 4.3m MT (+5% YoY) at 68%, as we expect to see production slowing down in 4QFY19. No dividend was declared, as expected.

Lifted by recovery in crush margins and volume. YoY, 9MFY19 CNP improved (+3%) to USD756m, largely attributed to the Tropical Oils (TO) segment. Despite a decline in revenue of 12% in the TO segment, PBT jumped 35% due to higher sales volume (+8%) and improved processing margin from cheaper feedstock, resulting in an increase (+1.6ppt) in PBT margin. Oilseeds and Grains (O&G) segment’s PBT, however, declined 41% on lower soybean crush margins (due to African swine fever) and marginally lower sales volume (-1%). QoQ, 3QFY19 CNP posted a significant improvement (+174%) on the back of: (i) 409% increase in PBT from the O&G segment as soybean crush margins and volume improved, underpinned by a gradual recovery in China’s pig herds, (ii) USD80m PBT vs. USD69m pretax loss in the Sugar segment attributed to the commencement of sugar crushing season in Australia.

Earnings to improve sequentially in 4QFY19. We expect Wilmar’s earnings to pick up sequentially riding on the sugar crushing season (June to November) in Australia and improvement in soybean crush margins and volume as China’s hog production gradually recovers. In the TO segment, despite the recent sharp spike in CPO prices (QTD: +9%), earnings should remain stable as we understand feedstocks have been locked in at lower prices helping to keep processing margins in check.

Trim Wilmar’s FY19-20E CNP by 1.9-1.0% to USD1.12-1.16b and PPB by 1.4-0.7% to RM1.11-1.19b as we lowered our FY19-20E FFB output by 7-3% to 4.03-4.21m MT.

Maintain UNDERPERFORM on PPB with a lower Target Price of RM16.30 (from RM16.50) 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 27.0x PER, reflecting its FY20E FFB growth of 4% 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 19.6x, while the stock is currently trading at 21.7x (+1.0 SD). As the valuation appears overstretched, with positives likely more than priced in, we maintain our UP call on PPB.

Source: Kenanga Research - 13 Nov 2019