KUALA LUMPUR: PPB Group Bhd is expected to report softer earnings in the first half of the financial year 2024 (1HFY24), following disappointing results by its 19 per cent-owned associate Wilmar International Ltd (WIL).
Kenanga Investment Bank Bhd (Kenanga Research) downgraded its forecast on PPB's FY24 core earnings per share (EPS) by 10 per cent but kept the FY25 core net profit.
It maintained an 'outperform' call with a target price of RM17.50.
According to the research firm, PPB's earnings can be volatile due to Wilmar's commodity exposures as well as its own feed milling operations where input raw material prices such as wheat and corn are subject to cycles and swings.
"However, the group has attractive agri-food businesses catering to the region's growing middle-class consumers.
"Wilmar is strong in China and India's edible oil and processed food markets, while PPB has its own flour, feed, and food businesses in Southeast Asia," it added.
Kenanga Research said Wilmar reported a weak 1HFY24 core net profit of US$606 million, meeting only 39 per cent of consensus FY24 profit on lower revenue and margins.
"Already affected in Q1FY24 by weaker revenue from softer commodity prices and further dampened by poor sugar merchandising, Q2FY24 revenue slid further against our expectation on flattish commodity prices, which continued to offset growth in off-take volume.
"Q2 operating margin stayed flat overall but was dragged down by weaker contributions from associates as well as higher tax charges," it said in a research note.
Nonetheless, Kenanga Research expects a better second half due to strong consumer food segment growth, which rose 77 per cent year-on-year (YoY) in 1HFY24, along with the improving demand for industrial feed, edible oils, and grains with better margins.
The firm also expects the palm oil earnings to pick up on higher seasonal fresh fruit branch (FFB) output on relatively firm crude palm oil (CPO) prices.
However, weaker sugar prices in 1HFY24 are expected to stay for the rest of FY24, while a stronger ringgit is expected to erode Wilmar's 2HFY24 contribution to PPB by 2.0 per cent to 3.0 per cent.
Overall, Kenanga Research 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.