KUALA LUMPUR: PPB Group Bhd, which is still working on acquiring a 20% stake in the flour-related business of its associate Wilmar International Ltd, is expected to show decent year-on-year (y-o-y) growth in third quarter earnings slated for release sometime this week, analysts said.
But concerns over challenging operating conditions and several downgrades at Wilmar, its largest earnings contributor, dampened sentiments for both PPB and its 18%-owned associate. Wilmar’s 3QFY11 ended Sept 30 numbers fell short of street estimates due to exceptional losses, while showing strong y-o-y growth.
Closing at RM16.06 and S$5.09 (RM12.43) yesterday, PPB slipped 6% while Wilmar is down close to 9% over the past nine market days following Wilmar’s 3Q earnings release the morning of Nov 9.
Wilmar’s net profit for the quarter would have jumped 157% to US$442.4 million (RM1.4 trillion) from US$172.4 million in 3QFY10 had it not been for exceptional items like foreign exchange losses which resulted from a stronger greenback against the Aussie dollar due to loans provided to its sugar unit, as well as fair value losses on the group’s convertible bonds. Instead, on the morning of Nov 9, Wilmar said net profit for 3QFY11 rose 24% to US$321 million on the back of a 69% jump in revenue to US$13.1 billion. Earnings were also short of 2QFY11’s US$393 million.
Has enough value emerged following the recent price weakness?
KAF Seagroatt & Campbell values PPB at RM18.80, while AmResearch is even more bullish at RM19.35, according to Bloomberg data. Both have a “buy” on PPB while HwangDBS Vickers Research thinks the stock “fully valued” at RM16.30.
Wilmar, which is more widely tracked, has 13 “buy” calls, eight “holds” and four “sells” following downgrades by Kim Eng Securities and HSBC post the 3Q release.
Kim Eng cut Wilmar to “sell” after slashing its fair value from S$5.31 to S$4.50, after factoring in lower margins as well as the possibility of more one-off items eating into earnings.
“For FY12 and FY13, we slash our forecasts by a substantial 25% and 3% respectively,” Kim Eng wrote in a note dated Nov 10. The brokerage house’s bearishness was also due to near-term pessimism on China’s economy, given that Wilmar is seen as a proxy to China’s growing affluence. Wilmar, which had previously been hit by unfavourable trading positions, could again be hit if volatility on global commodity prices again rises significantly, it added.
Little wonder then that PPB’s stock price has slid in tandem, given that contributions from Wilmar — its largest earnings contributor following the disposal of its sugar business to what is now MSM Malaysia Bhd — is expected to continue to be sizeable until PPB’s other consumer businesses catch up in size.
One potential boost for PPB could come from the completion of the purchase of a 20% stake in Wilmar’s flour business in China. That is hoped to help make up for some of the earnings contributions lost from PPB selling a 20% stake in its Malaysian flour unit — FFM Bhd — to Wilmar earlier this year. At its 2Q briefing, PPB’s key management would only say paperwork for the transaction is being prepared and that plants in China will beat the size of those in Malaysia, given the difference in addressable market, without specific numbers.
Whatever the case, analysts who are less bearish on China’s economy and Wilmar’s growth prospects pointed out that the company had hitherto demonstrated the ability to build on its core competencies.
“Wilmar has shown strong underlying operational strength in its results which will continue to benefit PPB in the long run,” one analyst said, pointing out that Wilmar would be a beneficiary of the recent export tax changes for palm oil products in Indonesia.
CIMB Research reckons investors should accumulate Wilmar shares on any price weakness. “The stock has [fallen] after it reported lower earnings due to exceptional losses as well as amid concerns over its portfolio investments, but we remain positive on mid-term earnings prospects,” CIMB wrote in a note dated Nov 10, valuing Wilmar at S$5.60 apiece.
PPB is also expected to benefit from Wilmar’s on-going expansion into the sugar business in the longer run, analysts said.
In the near term, PPB’s earnings won’t see much of a boost from the recent purchase of Porserpine Cooperative Sugar Milling Association’s (PCSMA) assets for a headline price of A$120 million (RM377 million) by Wilmar’s wholly-owned Australian sugar unit, Sucrogen Ltd, given its size. The purchase, however, is expected to boost Sucrogen’s milling capacity and raw sugar production by about a 10th.
This article appeared in The Edge Financial Daily, November 22, 2011.
But concerns over challenging operating conditions and several downgrades at Wilmar, its largest earnings contributor, dampened sentiments for both PPB and its 18%-owned associate. Wilmar’s 3QFY11 ended Sept 30 numbers fell short of street estimates due to exceptional losses, while showing strong y-o-y growth.
Closing at RM16.06 and S$5.09 (RM12.43) yesterday, PPB slipped 6% while Wilmar is down close to 9% over the past nine market days following Wilmar’s 3Q earnings release the morning of Nov 9.
Wilmar’s net profit for the quarter would have jumped 157% to US$442.4 million (RM1.4 trillion) from US$172.4 million in 3QFY10 had it not been for exceptional items like foreign exchange losses which resulted from a stronger greenback against the Aussie dollar due to loans provided to its sugar unit, as well as fair value losses on the group’s convertible bonds. Instead, on the morning of Nov 9, Wilmar said net profit for 3QFY11 rose 24% to US$321 million on the back of a 69% jump in revenue to US$13.1 billion. Earnings were also short of 2QFY11’s US$393 million.
Has enough value emerged following the recent price weakness?
KAF Seagroatt & Campbell values PPB at RM18.80, while AmResearch is even more bullish at RM19.35, according to Bloomberg data. Both have a “buy” on PPB while HwangDBS Vickers Research thinks the stock “fully valued” at RM16.30.
Wilmar, which is more widely tracked, has 13 “buy” calls, eight “holds” and four “sells” following downgrades by Kim Eng Securities and HSBC post the 3Q release.
Kim Eng cut Wilmar to “sell” after slashing its fair value from S$5.31 to S$4.50, after factoring in lower margins as well as the possibility of more one-off items eating into earnings.
“For FY12 and FY13, we slash our forecasts by a substantial 25% and 3% respectively,” Kim Eng wrote in a note dated Nov 10. The brokerage house’s bearishness was also due to near-term pessimism on China’s economy, given that Wilmar is seen as a proxy to China’s growing affluence. Wilmar, which had previously been hit by unfavourable trading positions, could again be hit if volatility on global commodity prices again rises significantly, it added.
Little wonder then that PPB’s stock price has slid in tandem, given that contributions from Wilmar — its largest earnings contributor following the disposal of its sugar business to what is now MSM Malaysia Bhd — is expected to continue to be sizeable until PPB’s other consumer businesses catch up in size.
One potential boost for PPB could come from the completion of the purchase of a 20% stake in Wilmar’s flour business in China. That is hoped to help make up for some of the earnings contributions lost from PPB selling a 20% stake in its Malaysian flour unit — FFM Bhd — to Wilmar earlier this year. At its 2Q briefing, PPB’s key management would only say paperwork for the transaction is being prepared and that plants in China will beat the size of those in Malaysia, given the difference in addressable market, without specific numbers.
Whatever the case, analysts who are less bearish on China’s economy and Wilmar’s growth prospects pointed out that the company had hitherto demonstrated the ability to build on its core competencies.
“Wilmar has shown strong underlying operational strength in its results which will continue to benefit PPB in the long run,” one analyst said, pointing out that Wilmar would be a beneficiary of the recent export tax changes for palm oil products in Indonesia.
CIMB Research reckons investors should accumulate Wilmar shares on any price weakness. “The stock has [fallen] after it reported lower earnings due to exceptional losses as well as amid concerns over its portfolio investments, but we remain positive on mid-term earnings prospects,” CIMB wrote in a note dated Nov 10, valuing Wilmar at S$5.60 apiece.
PPB is also expected to benefit from Wilmar’s on-going expansion into the sugar business in the longer run, analysts said.
In the near term, PPB’s earnings won’t see much of a boost from the recent purchase of Porserpine Cooperative Sugar Milling Association’s (PCSMA) assets for a headline price of A$120 million (RM377 million) by Wilmar’s wholly-owned Australian sugar unit, Sucrogen Ltd, given its size. The purchase, however, is expected to boost Sucrogen’s milling capacity and raw sugar production by about a 10th.
This article appeared in The Edge Financial Daily, November 22, 2011.
