Saturday, September 15, 2012

PPB/Wilmar


The stock prices of PPB and its 18.3% owend associate Wilmar Intl have plummeted over the past three months (June 2012 – Aug 2012) to their lowest in three years but market observers are wondering whether the worst is over.
 
Meanwhile PPB Group Bhd believes the business model of its 18.3% owned Wilmar International is sound and expects the latter's financial performance to improve once market conditions turn around. Wilmar had four years of good earnings. It has been in the commodities business for long time, and have the experience to address and mitigate uncertainties.
 
PPB’s Prospects …
 
PPB is the largest oil palm processor and has 50% share of branded consumer cooking oil market. The Chinese government in Aug 2012 reportedly asked companies like Wilmar not to raise cooking oil prices unless it was absolutely necessary to keep a lid on infiation.
 
There are no immediate catalysts and operating conditions continue to be challenging (Aug 2012).
 
Over 70% of its earnings come from Wilmar.
 
PPB’s environmental engineering business has rm120 million worth of water and sewerage related jobs on its books and is eyeing similar contracts coming up soon such as the Langat 2 project in Selangor presents rm8 billion worth of possibilities.

Its GSC is no longer pursuing expansion in China but is exploring the possibility of entering Vietnam and Indonesia . Some rm95 million has been set aside to open seven more cinemas over the next two years in Malaysia .

Its Massimo bread business is already profitable and FFM is setting aside rm40 million to expand the breadmaking capacity.

The group budgeted RM467mil for capital commitments from 2012 till 2014 for its grains trading, flour and feed milling segment (RM342mil), film, exhibition and distribution (RM106mil) as well as property investment and development.

It reported a net profit of rm108.42 million for its second quarter ended June 2012 which was a fall of 60.8% year on year. The company said this was mainly due to the lower profit contribution from Wilmar.

There is not enough confidence instilled among investors that Wilmar will improve in the short term, and see challenges ahead.
 
Weak CPO prices are likely to persist in the medium term and recommended investors to exit Wilmar and IOI Corp.
 
Wilmar’s Prospects …
 
After years of rapid expansion through acquisitions as well as organic growth, it is now (Sept 2012) a much larger and more complex corporate group than before, making it more difficult than ever to forecast the margins it makes on trading and processing commodities. Rising costs and intensifying competition have not helped either. In fact, WIlmar has now (Sept 2012) fallen short of the market’s earnings forecasts for four consecutive quarters.
 
Food price inflation has also been a growing source of concern for governments of large population nations such as China , which Wilmar counts among its key growth markets. That has increased the odds of the company’s being hit by bouts of price controls and other forms of regulatory intervention, and spells greater uncertainty for shareholders of Wilmar.
 
Despite its slumping market value (Sept 2012), Wilmar is still a palm oil juggernaut with massive scale. It reports its operating profits by five major divisions. The major division is palm and laurics, which processes palm and lauric oils into refined oils, specialty fats, oleochemicals and biodiesel distributing these products through a network that covers more than 50 countries.
 
It owns processing plants in major palm oil producing countries such as Indonesia and Malaysia as well as in consuming markets such as China , Europe and Vietnam . In FY2011, merchandizing and processing of palm and laurics accounted for 30% of pre tax profits.
 
The second largest of its divisions, contributing 25% to pre-tax profits is plantaions and palm oil mills. As at end Dec 2011, roughly 74% of Wilmar’s 247081ha of planted area was located in Indonesia with another 24% in East Malaysia and 2% in Africa . Wilmar also owns plantations in Uganda and West Africa through JV.
 
Wilmar also has a sizeable business in oilseeds and grains. This divisions has grown significant accounting for 2% of pre tax profits in FY2011. In China , Wilmar is a leading oilseeds crusher.
 
Wilmar also one of the largest rice and wheat millers in China .
 
In 2010, Wilmar expanded into the sugar business through the acquisition of Sucrogen, one of the world’s largest raw material producers and a leading sugar refiner in Indonesia . In July 2011, it acquired one of eight licensed sugar refineries in Indonesia . In Dec 2011, it also acquired another sugar mills.
 
Wilmar now has a sugar business that accounted for 2% of pre tax profits in FY2011.
 
Finally, the smaller division with 4% of pre tax profits is the consumer products division which produces and sells consumer packs of edible oils, rice, flour and grain marketed under its own brands.
 
Its 2QFY2012’s earnings …
 
A chunk of Wilmar’s earnings miss in 2Q2012 came from the palm and lauric segment.
 
Also its plantation divisions also turned in weak numbers in 2Q2012.
 
Meanwhile its consumer pack edible oil business continues to worry. To curb inflation, the Chinese government has been holding talks with the country’s major edible oil producers to ensure price stability.
 
It is also continuing to see red link at its oilseeds and grains division which reported a second consecutive quarter pre tax losses in 2Q2012 owing to a negative crush margins and a weaker renminbo. Crush margins were the worst in 10 years, as the industry is currently suffering from excess capacity. Wilmar is likely to be affected by a global shortage of soybeans that has resulted in a spike in soybeans that has resulted in a spike in soybean prices.
 
Another area of concern has been Wilmar’s sugar milling business where pre tax losses widened in 2Q2012 because of wet weather in Australia .
 
Is this an opportunity for investors?
 
Kuok himself warns that Wilmar’s businesses in China face challenging conditions. The excess capacity in oilseed crushing will also continue to affect profitability in that division, while a possible further weakening of the renminbi against the US dollar would be negative for the company. Yet he insists the long term prospects for the oilseed and consumer products businesses remain promising because of growing demand in markets such as China . And Wilmar is working to improve the profitability of its various divisions.
 
Oilseed crushing business is an important part of its integrated business in model in China . Oilseed crushing margins in China will have the most impact on FY2012 results.
 
There is a chance that Wilmar will be able to buy subsidies soybean from the Chinese government in 2H2012 this easing cost pressures. China has strategic soybean reserves.
 
Even if WIlmar’s earnings growth recovers in the quarters ahead (Sept 2012 & Beyond), will it be just a matter of time before its commodity trading or processing margins suffer another squeeze. What if China clamps down on selling prices of staple food again?
 
The fact is that there is no other company quite like Wilmar. It is one of the largest producers of palm oil and sugar in the world. It has 50% share of China ’s cooking oil market. In Australia and NZ its refined sugar products represent more than 60% of volume sale across the retail, food service and F&B ingredient markets.
 
While its profit margins have been under pressure, the company does not appear to be ceding any market share.
 
Wilmar remains a conduit for Asia ’s food supply. The company business model as an integrated supply chain manager remains intact. It has continued to see steady market share gains and volume growth for its key divisions. So while its shares might have suffered a setback in face of lower profitability, the company still operates a crucial and growing business with some of the bigger consuming nations of the future as its key market.
 
Whatever the case, Wilmar seems more interested in buying back its stock than issuing more shares.

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