KUALA LUMPUR (Aug 14): PPB Group Bhd (KL:PPB) is expected to report a softer first-half (1HFY2024) earnings, following a disappointing 1HFY2024 performance by its 19%-owned associate Wilmar International Ltd (WIL).
In a company update note on Wednesday, Kenanga lowered its FY2024 core earnings per share (EPS) for PPB by 10%, to reflect a weaker 1HFY2024.
The house maintained PPB’s FY2025 earnings, acknowledging that the fundamental outlook for the group is unchanged.
Wilmar reported a weak 1HFY2024 core net profit of US$606 million (RM2.68 billion), meeting only 39% of consensus FY2024 profit on lower revenue and margins, said Kenanga. Wilmar contributes nearly 80% of PPB’s earnings, according to PPB’s latest annual report.
Despite this, PPB’s FY2025-based target price (TP) of RM17.50 and “outperform” call were maintained by the house.
While a soft 1QFY2024 by Wilmar (affected by commodity trades) failed to materialise, Wilmar’s expected 2HFY2024 improvement is to follow suit, the research firm said.
“Already affected in 1QFY2024 by weaker revenue from softer commodity prices and further dampened by poor sugar merchandising, 2QFY2024 revenue slid further against our expectation on flattish commodity prices, which continued to offset growth in off-take volume,” Kenanga said.
Nonetheless, it expects a better 2HFY2024 for the group, due to strong consumer food segment growth, which rose 77% year-on-year (y-o-y) in 1HFY2024.
Additionally, the improving demand for industrial feed, edible oils and grains with better margins are also likely to contribute to a possible 2HFY2024 improvement for Wilmar.
Along with this, palm oil earnings are expected to pick up on higher seasonal fresh fruit branch (FFB) output, on relatively firm commodity pool offer prices.
However, factored into Kenanga’s FY2024 revised earnings, weaker sugar prices in 1HFY2024 are expected to stay for the rest of FY2024 and a stronger ringgit is expected to erode Wilmar’s 2HFY2024 contribution to PPB by 2%-3%.
At the current TP, PPB trades at 0.9 times FY2024F price by volume, says Kenanga. It added that the TP is based on a 16 times FY2025F price earnings ratio (PER) minus a 15% holding company discount.
Overall, the research house remains optimistic of Wilmar’s consumer food segment on improving demand, underpinned by the region’s growing middle class, post-pandemic normalisation in disposable income and spending, as well as raw material input cost staying contained.
“Trading below both book value and market PER (price-to-earnings ratio), we believe PPB provides longer term upside amid some volatility in the nearer term,” the house concluded.
PPB’s shares lost 12 sen or 0.8% to settle at RM14.58 in morning trades on Wednesday, valuing the group at RM20.7 billion.