MIDF lowers PPB Group to ‘neutral’ on flat earnings growth outlook

PETALING JAYA: MIDF Research has downgraded its call on PPB Group Bhd to “neutral” on the back of flat earnings growth anticipated for the group’s associate Wilmar International Ltd.
Singapore-listed Wilmar, in which PPB Group has an 18.3% stake, announced a 4% year-on-year drop in core net profit to US$1.17 billion (RM4.85 billion) for the full year ended Dec 31, 2015 (FY15).
Wilmar said last week that the drop was mainly due to foreign exchange translation losses as a result of weaker regional currencies against the US dollar. It also announced a dividend of S$0.055, bringing the full year dividend to S$0.08.
MIDF Research said Wilmar’s FY15 earnings are within expectations. Although earnings were weaker on-year in the tropical oils segment (pre-tax profit fell 44% to US$546 million) and sugar segment (pre-tax profit fell 38% to US$83 million), Wilmar posted “stellar” performance from the oilseeds and grains segment (pre-tax profit rose 98% year-on-year to US$690 million), which moderated the core net profit decline rate to only 4%.
“Tropical oils segment earnings should improve in FY16 due to improved crude palm oil price and the award of Indonesia biodiesel quota in November 2015. However, we think that the outlook for oilseeds and grains segment may be lacklustre in view of slowing economy growth in China.
“Sugar segment earning is expected to be flat due to low gross domestic product growth in Australia. Overall, we expect FY16 core earnings of US$1.16 billion or flattish on-year growth,” it said in its report last Friday.
MIDF Research expects PPB Group’s FY15 earnings to meet its forecast of RM964 million as Wilmar’s earnings are in line. In FY14, Wilmar’s pre-tax profit contribution to the group was 68%.
“Since our upgrade on the stock to ‘buy’ on July 6, 2015 when the share price was RM14.98, the stock has appreciated by 6.8%. This has clearly outperformed FBM KLCI’s -2.2% return for the same period.
“In view of the share price increase and flattish earnings growth seen for FY16, we downgrade the stock to ‘neutral’. However, the long term outlook for PPB Group remains positive due to Wilmar’s resilient business model and vertical integration in the food industry,” it said.
It maintained its target price of RM18 as well as its earnings forecast for the group for both FY15 and FY16.