PPB is expected to report softer 1HFY24 earnings following disappointing 1HFY24 results from 19% associate, Wilmar International Limited (WIL). An expected improvement in 2QFY24 after a soft 1QFY24 by WIL (affected by commodity trades) failed to materialise. While a significant 2H turnaround cannot be dismissed as happened last year, we lower our FY24F core EPS by 10% to reflect a weaker 1HFY24 but maintain FY25 earnings as its fundamental outlook is unchanged. Our FY25F-based TP of RM17.50 and OUTPERFORM call are maintained.

WIL reported weak 1HFY24 core net profit of USD606m (-39% HoH, +5% YoY), meeting only 39% of consensus FY24 profit on lower revenue and margins. Already affected in 1QFY24 by weaker revenue from softer commodity prices and further dampened by poor sugar merchandising, 2QFY24 revenue slid further against our expectation on flattish commodity prices which continued to offset growth in off-take volume. 2Q operating margin stayed flat overall but was dragged down by weaker contributions from associates as well as higher tax charges.

A better 2H is still expected on the back of: (i) strong consumer food segment growth which rose 77% YoY in 1HFY24 on robust demand coupled with continuing flat or softer input raw material costs, (ii) improving demand for industrial feed, edible oils and grains along with better margin while (ii) palm oil earnings should pick up on higher seasonal FFB output on relatively firm CPO prices. Weaker sugar prices in 1HFY24 are expected to stay for the rest of FY24. However, a stronger MYR is expected to erode WIL’s 2H contribution to PPB by 2%- 3% which have been factored into FY24 revised earnings.

Further ahead, we remain optimistic of WIL’s consumer food segment on improving demand, underpinned by the region’s growing middle class, post-pandemic normalisation in disposal income and spending as well as raw material input cost staying contained.

Forecasts. Downgrade FY24 core earnings by 10% to reflect WIL’s disappointing 1HFY24 performance but FY25 core net profit is kept.

Valuations. Maintain TP at RM17.50 based on 16x FY25F PER, which is the average for larger capitalised integrated plantation PER minus a 15% holding company discount. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3). At our TP of RM17.50, PPB trades at 0.9x FY24F PBV.

Investment case. PPB’s earnings can be volatile due to associate Wilmar’s commodity exposures as well as its own feed milling operations where input raw material prices such as wheat and corn are subject to cycles and swings. However, the group has attractive agri-food businesses catering to the region’s growing middle-class consumers. Wilmar is strong in China and India’s edible oil and processed food markets while PPB has its own flour, feed and food businesses in SE Asia.

Trading below both book value and market PER, we believe PPB provides longer term upside amidst some volatility in the nearer term.

Maintain OUTPERFORM.

Risks to our call include: (i) weather impact on edible oil supply, (ii) unfavourable commodity prices fluctuations, and (iii) production cost inflation.

Source: Kenanga Research - 14 Aug 2024