Wilmar delivered superb results for FY 2008. Look at this table, you will be impressed.
Unlike other plantation stocks where you see earnings drop by almost 40-50% due to softer price, Wilmar was able to hold on to its profit. Why? Wilmar is a food processor and not a pure plantation stock. Yes they do have plantation contributing to their earnings but not substantial.
Consensus does not think Wilmar is able to sustain its earning for FY 2009, they are projecting downward between 30 - 40%. Net profit will come in between US 880 mln - US 1 billion. EPS will be in the range of US $ 0.14 - US $ 0.16. I can agree to the downward revision range but I may be able to agree to PE ratio which will depend on the mood of the Mr. Market. 8 - 9 X when Mr. Market sees the end of the world, 15 - 18 X when Mr. Market sees Nirvana is the only place to go. So, I am not going to talk about the target price then. What is more important is how this will impact PPB.
PPB fortune is heavily depending on Wilmar. In FY 2008, Wilmar contributed almost 67%(937 mln/1400 mln) of PPB profit before tax. Repeat - 67%!
Profit from PPB operations is very disappointing in Q4 ‘08 – almost breakeven, this is a sharp drop compared to a year ago which was about RM 70 mln. With more careful reading into their results, they written down about RM 67 mln related to diminution of investment and inventory, am I surprise? No. We got to be very careful during deflation/deleveraging environment if there are companies involved in commodity, carrying investment portfolio or goodwill in their balance sheet. Provision for Write off or outright write off is the order of the day. If we are invested in companies that thinly traded and play mainly by retail investor, as soon they see dramatic shrinkage impacted by write down, more likely than not, they will throw the baby out together with the bath water. Back to PPB, without this write down, profit from the operations is essentially flat.
For FY 2008, PPB delivered about RM 1.3 billion profit or EPS of RM 1.08/share. So, what is the prospect for FY 2009? Given the defensive nature of PPB core business, let’s say they can maintain RM 400 mln[pure PPB core businesses] plus RM 655 mln [from Wilmar]= RM 1.06 bln PBT, subtract some tax about RM 110 million will give us roughly RM 945 mln Net Income. EPS will be roughly about RM 0.80/share. Pick any PE ratio you want : 8X = RM 6.4, 10X = RM 8, 15X? = RM 12. Price range can swing wildly between RM 6.40 – RM 12.
Wilmar has not been paying a lot of dividend as they need cash for expansion, so it is unlikely that we can see real cash from Wilmar. It is however quite safe to conclude they will payout most of PPB businesses which could be in the range of RM 0.25 – RM 0.30/share. 2008 was an anomaly, they paid special dividend of RM 0.65/share – I don’t expect this to repeat. At the last quoted price of RM 9.70, DY is around 3%.
The trick is this: watch Mr. Market, take advantage of him and make sure we leave ourselves with some margin of safety – we will come out all right!
Watching the tape has kept me out of troubles since October but we have rode down together with our friendly neighborhood BEAR for quite a lot and for quite a while – I think we all will benefit more by spending time studying stocks again. To hell with the bear!
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