PPB Group Bhd
(Nov 13, RM18.06)
Maintain underperform with a lower target price (TP) of RM16.30: PPB Group Bhd’s 18.56%-owned Wilmar International Ltd’s (Wilmar) third quarter of financial year 2019 (3QFY19) core net profit (CNP) came in broadly within expectations at US$303 million (-6% year-on-year [y-o-y]; +174% quarter-on-quarter [q-o-q]), bringing nine months of financial year 2019 (9MFY19) CNP to US$756 million (+3% y-o-y), accounting for 66%/67% of our/consensus estimates, respectively. Fourth quarter of the financial year is usually the strongest on the back of sugar crushing season in Australia. As a historical check, the first nine months of the financial year’s profits for the past five years (except 9MFY16) constituted 64%-75% of a full-year earnings. However, 9MFY19 fresh fruit bunch (FFB) output of 2.95 million tonnes (-7% y-o-y) came in below our FY19 forecast of 4.3 million tonnes (+5% y-o-y) at 68%, as we expect to see production slowing down in 4QFY19. No dividend was declared, as expected.

Y-o-y, 9MFY19 CNP improved (+3%) to US$756 million, largely attributed to the tropical oils (TO) segment. Despite a decline in revenue of 12% in the TO segment, profit before tax (PBT) jumped 35% due to higher sales volume (+8%) and improved processing margin from cheaper feedstock, resulting in an increase (+1.6 percentage points) 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%). Q-o-q, 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; and ii) US$80 million PBT versus US$69 million pre-tax loss in the sugar segment attributed to the commencement of sugar crushing season in Australia.

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 crude palm oil (CPO) prices (quarter-to-date [QTD]: +9%), earnings should remain stable as we understand feedstocks have been locked in at lower prices which is helping to keep processing margins in check.

We trim Wilmar’s financial year 2019–2020 estimated (FY19-20E) CNP by 1.9-1.0% to US$1.12-1.16 billion and PPB by 1.4-0.7% to RM1.11-1.19 billion as we lowered our FY19-20E FFB output by 7-3% to 4.03-4.21 million tonnes.

We lowered TP of RM16.30 (from RM16.50) based on joint sum-of-parts between PPB and Wilmar. We value its grains & consumer products segment at 21.7 times price-earnings ratio (PER), representing a 30% discount to QL Resources Bhd’s three-year forward PER of 31.0 times; Palm plantation segment at 27.0 times PER, reflecting its FY20E FFB growth of 4% and large market capitalisation and FTSE Bursa Malaysia KLCI component statuses; Film segment at 20.0 times PER, in line with consumer retail peers; Sugar segment at 18.0 times PER, in line with MSM’s valuation, and other segments at book value. Our TP implies FY20E PER of 19.6 times, while the stock is currently trading at 21.7 times (+1.0 standard deviation). As the valuation appears overstretched, with positives likely more than priced in, we maintain our “underperform” call on PPB. — Kenanga Research, Nov 13