9MFY19 Core Net Profit of RM802.5m (-7% YoY) came in within our expectation. Moving forward, we expect to see continual earnings pickup from Wilmar against the backdrop of the sugar crushing season in Australia. Post results, we upgrade PPB to MARKET PERFORM with higher SoP-driven TP of RM17.90 (from RM16.30) as we tugged our valuations higher for its Grains and Consumer Products segment, which is pegged at a 30% discount to QL Resources.

Within our expectation. 9MFY19 core net profit (CNP) of RM802.5m came in-line at 72% of our estimate but above consensus at 77%. We believe the deviation is largely due to the stronger-than-expected Grains and Agribusiness earnings, which are lifted by better flour prices. No dividend was declared, as expected.

YoY, 9MFY19 CNP slipped 7%, as weaker earnings from Wilmar (-4%) was partially offset by (i) stronger contribution from Grains and Agribusiness (+6%), thanks to improved flour prices which helped cushioned costlier raw materials, coupled with (ii) marginally better performance from its film business (+2%).

QoQ, 3QFY19 CNP more than doubled to RM395.2m, hugely thanks to great improvements from both Wilmar and its Grain and agribusiness which saw more than two folds jump in the segments’ contribution respectively. This is attributed to Wilmar’s recovery in soybean crush margins and volumes, coupled with the improvement in flour prices.

Ending the year on a better note? Moving forward, we believe Grains & Agribusiness will likely be buoyed by more favourable flour prices, which should help cushion higher raw material costs to keep margins in check. On the flip side, we expect Wilmar’s earnings to improve sequentially in 4QFY19, driven by the sugar crushing season (June to November) in Australia in tandem with the recovery in soybean crush margins and volumes as China’s hog production gradually improves. 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.

Post-results, we made no changes to our forecasts.

Upgrade to MARKET PERFORM with a higher TP of RM17.90 (from RM16.30) based on joint Sum-of-Parts between PPB and Wilmar. We raised our valuations for Grains & Consumer Products segment to 27.0x (from 22.0x) which is as a 30% discount to QL Resources’ 3-year Fwd. PER of 38.0x (from 31.0x) as we see that investors are willing to pay for a higher valuations for the latter. We value its 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 21.5x, while the stock is currently trading at 21.7x (somewhat in-line at +1.0SD). Following the valuations upgrade, we now have a MARKET PERFORM call on PPB, with positives likely to be mostly priced in.

Risks to our call include: (i) worse-than-expected crush/refining margin, (ii) more favourable commodity price trends, and (iii) weakerthan-expected sales volume and consumer demand.

Source: Kenanga Research - 22 Nov 2019