PPB’s 18.56%-owned Wilmar’s 4QFY19 CNP of USD409m (+72% YoY; +35% QoQ), brought FY19 CNP to USD1,165m (+20% YoY), within our/consensus’ estimates at 104%/100%. FY19 DPS of S$12.5 cent (4QFY19: S$9.5 cent) was a pleasant surprise. Moving forward, 1QFY20 earnings could see some weakness (temporary) from COVID-19 impact. Fine-tune Wilmar’s FY20E CNP by -0.1% and introduce FY21E CNP of USD1.27b. Maintain MARKET PERFORM with an unchanged SoP-derived TP of RM19.60.

Within expectations. PPB’s 18.56%-owned Wilmar International (Wilmar)’s 4QFY19 CNP came within expectations (104%) at USD409m (+72% YoY; +35% QoQ), bringing FY19 CNP to USD1,165m (+20% YoY), accounting for 104%/100% of our/consensus estimates. FY19 FFB output of 3.91m MT (-5% YoY) also came in within our forecast of 4.03m MT (-2% YoY) at 97%. A final dividend of S$9.5 cent was proposed, bringing FY19 dividend to S$12.5 cent, which is above our expected S$10.0 cent.

Downstream shines. YoY, FY19 CNP improved (+20%) to USD1,165m mainly due to the Tropical Oils (TO) segment. Despite declining TO segment’s revenue (-9%), PBT jumped 54% due to higher sales volume (+5%) and improved processing margin from cheaper feedstock, resulting in an increase (+2.2ppt) in PBT margin. On the other hand, Oilseeds and Grains (O&G) segment’s PBT fell (-27%) as PBT margin was compressed (-0.9ppt) from lower soybean crush margins (due to African swine fever [ASF]) and marginally lower sales volume (-1%). QoQ, 4QFY19 CNP surged (+35%) on the back of: (i) 49% increase in PBT in the TO segment due to improved margins from locking in lower feedstock prices, and (ii) improvement (+244%; low base effect) from its associates and JVs.

Expect weakness in 1QFY20. We believe that Wilmar’s 1QFY20 earnings could soften as soybean crush margins and volume are expected to be adversely affected by COVID-19. Additionally, its sugar segment is likely to register losses with the end of sugar crushing season (June to November) in Australia. Nevertheless, weakness in soybean crush margins and volume should be temporary in line with our views; (i) the COVID-19 virus impact is unlikely to extend beyond 1QFY20, and (ii) gradual post-ASF recovery of China’s hog production.

Fine-tune Wilmar’s FY20E CNP by -0.1% to USD1.20b due to housekeeping and introduce FY21E CNP of USD1.27b.

Maintain MARKET PERFORM on PPB with an unchanged Target Price of RM19.60 based on joint Sum-of-Parts between PPB and Wilmar. We value its Grains & Consumer Products segment at 27x PER, representing a 30% discount to QL Resources’ 3-year Fwd. PER of 38.0x; Palm Plantation segment at 31x PER, reflecting higher CPO prices and its large-cap/FBMKLCI component status; Film segment at 20.0x PER, in line with Consumer Retail peers; Sugar at 18.0x PER, and other segments at book value. Our TP implies FY20E PER of 23x (mean), while the stock is currently trading at 21.5x (-0.5SD).

Source: Kenanga Research - 21 Feb 2020