Lower CPO prices to weigh on PPB earnings

Kenanga Research yesterday cut its core net profit forecasts for PPB by 3.1% and 1.6% for the financial years ending Dec 31, 2019 and 2020 respectively to RM1.17bil and RM1.21bil.

PETALING JAYA: The earnings of PPB Group Bhd, a diversified company controlled by billionaire Robert Kuok, are expected to be weighed down by lower crude palm oil (CPO) prices over the next two years.

Kenanga Research yesterday cut its core net profit forecasts for PPB by 3.1% and 1.6% for the financial years ending Dec 31, 2019 and 2020 respectively to RM1.17bil and RM1.21bil.

According to the brokerage, average CPO prices this year would likely come at RM2,000-RM2,200 per tonne, lower than its previous forecast of RM2,400 per tonne for 2019.

Meanwhile, Kenanga Research also trimmed its core net profit forecast for PPB’s Singapore-listed associate Wilmar International Ltd by 4.5% to US$1.13bil (RM4.7bil) for 2019 and 2.3% to US$1.15bil (RM4.79bil) for 2020.

PPB owns 18.5% interests in Wilmar, an integrated agribusiness group, according to the company’s website.

Kenanga Research cut its target price for PPB to RM16 from RM16.60, while maintaining the “underperform” call for the counter, based on the joint sum-of-parts between PPB and Wilmar.

“Our target price implies 19.5 times estimated price-earnings for 2019 (historical mean), while the stock is currently trading at 22.7 times. As the valuation appears overstretched, we recommend investors to take profit,” Kenanga Research wrote in its report.

Wilmar’s core net profit rose 9% year-on-year to US$342mil in the first quarter of 2019. The numbers were within consensus and Kenanga’s expectations and the earnings improvement was driven by cheaper feedstocks in the tropical oil segment but dampened by lower crush margins in the oilseeds and grains division.

Kenanga Research expected Wilmar’s earnings to see further improvement in the second quarter on stronger performance of its oilseeds and grains division.

“We believe crush margins will improve in the second quarter as the adverse effect of the African swine fever outbreak subsides,” the brokerage explained.

“Additionally, Brazilian soybean crops have entered the main harvesting month in March, replenishing soybean supply and easing prices, which also bodes well for crush margins,” it said.

In the tropical oil segment, however, earnings could soften marginally as CPO prices have trended down since mid-February.

“Fortunately, the group has locked in feedstocks (CPO and palm kernel) at low prices during the fourth quarter of 2018 as hinted by management earlier (likely even lower than current levels), though details regarding the hedging terms/duration were not disclosed. This should keep the segment’s processing margins relatively stable,” Kenanga Research said.

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