PPB to benefit from Wilmar’s China listing

KUALA LUMPUR: PPB Group Bhd (PPB Group) stands to gain from parent company Wilmar International Ltd's (Wilmar) potential separate listing in China, having recently converted its China holding company into a joint-stock company.

Management explained that the main objective of the listing is to achieve higher market penetration into China's huge consumer food market. The listing would position Wilmar as a local consumer food player, allowing it to expand more aggressively and possibly receive more favourable local support/treatment.

“Although no timeline was guided, we believe management would endeavour to expedite the process and actualise it by endFY19 or early-FY20,” said analysts at Kenanga Investment Bank Bhd yesterday. “We are positive on this as it potentially offers valuation boost for Wilmar, and special dividends for PPB Group.”

For Wilmar, the research firm estimated that this would likely mean a significant valuation boost as the company is only trading at a FY19E price earnings ratio of 12.9 times against Shanghailisted consumer companies such as Foshan Haitian Flavouring & Food Co at 41.6 times, Inner Mongolia Yili Industrial Group at 21.5 times and New Hope Liuhe at 20 times.

“We understand that circa 70 per cent of Wilmar's earnings comes from China, of which about half is from its consumer business,” Kenanga Research said. “Assuming its China business is valued at 20 times while the remaining 30 per centof Wilmar's business continues to be valued at 12.9 times, the listing could boost Singapore-listed Wilmar's fair value to S$4.19 per share, a 29 per cent upside from current price of S$3.26 per share.

“For PPB Group, however, the benefit of the listing is more likely to come in the form of special dividends from Wilmar, although we are uncertain about the quantum at this juncture.”

This came on the back of Wilmar's results for its fourth qwuarter of financial year 2018 (FY18) whereby management hinted that the company has locked in feedstocks at low prices since 4Q18, though details regarding the hedging terms/ duration were not disclosed.

This bodes well for its processing margins as selling prices have been trending up lately while some of its feedstock costs are fixed.

“As such, we believe the Tropical Oils (TO) would perform well in 1Q19. On the other hand, soybean crush margins have likely remained weak in recent months as the African swine fever outbreak in China continues to hurt feed meal demand,” the research firm said.

“For this reason, we believe the Oilseeds & Grains (O&G) segment could hit a soft patch in 1Q19 with both lower volume and crush margins, but we do not expect losses.”

Nevertheless, Kenanga Research said the situation is likely to improve in 2Q19 when Brazilian soybean crops enter the main harvesting month in March, replenishing soybean supply and easing prices.

This would likely widen crush margins again, it said, though the significance of the impact would only be felt in 2Q19.

“Overall, earnings are likely to soften sequentially. With Wilmar's sugar segment also entering a maintenance season due to low crushing activities, we believe Wilmar's overall 1Q19 earnings would soften further quarter on quarter.”