Mutual gains for PPB and Wilmar Enlarged group set to be dominant force in China

Given the rising crude palm oil (CPO) prices, one might think that PPB Group Bhd got a raw deal when it swapped its plantation businesses for shares in Wilmar International Ltd.
However, PPB Group executive chairman Datuk Oh Siew Nam absolutely disagrees and insists it is a win-win deal for both parties.

Critics have said PPB Oil Palm Bhd deserved more shares in Wilmar simply because the upstream business was more profitable in the current upcycle of CPO prices than downstream activities, on which Wilmar concentrates.

“We hold a smaller stake but in a bigger entity now,” Oh told StarBiz.

He highlighted that the enlarged entity, in which PPB Group owns an 18.2% stake, would continue to grow its downstream businesses, including edible oil refining, specialty fat and oleochemical manufacturing, plus expanding the plantation acreage.

In Oh’s view, pooling resources via mergers would give economies of scale and create synergistic benefits when tapping new markets.

The populous China, India and Indonesia are markets that the Wilmar group intends to focus on.

Oh said demand for oil and fats in the three countries was expected to increase substantially as economic growth further accelerated.

The low edible oil consumption per capita and the large population base augur well for Wilmar to expand its palm-based downstream as well as flour and rice milling activities, he added.

Wilmar will dominate the consumer edible oil market in China after the merger.

The enlarged group will be the biggest oilseeds crusher and edible oil refiner on mainland China and will have 1.4 million acres of oil palm estates.

The PPB Group is a diversified conglomerate with mainly commodity-based core businesses like flour and feed milling, grains trading, in addition to oil palm plantations. It is also engaged in property development and entertainment. The sugar and flour business generates 40% of the group’s earnings.

Last December, Wilmar made a general offer to acquire PPB Oil Palm, Kuok Oils & Grains Pte Ltd and PGEO Group Sdn Bhd in a S$4.1bil deal via a share swap.

PPB Group emerged as the second largest shareholder in the enlarged Wilmar. PPB Group’s stake will boost Kuok group’s shareholdings to 31% stake in Wilmar after the merger.

PPB Oil Palm was a 54.5%-owned subsidiary of PPB Group, whose wholly-owned subsidiary FFM Bhd held a 28% stake in KOG and 65.8% of PGEO.

Wilmar shares have been climbing since the mergers were announced but softened slightly recently.

The stock closed at S$3.22 yesterday. Year-to-date, the shares have gained 32% or 79 Singapore cents.

Wilmar will be a big-cap stock on the Singapore Exchange with a market capitalisation of US$13bil after the merger.

“There are lots of synergies between the two groups (Wilmar and PPB Group), although they can’t be quantified,” Oh noted.

The synergistic benefits of the merger would be reflected in the future earnings of the enlarged Wilmar, said Oh, who is also director of Kuok Brothers Sdn Bhd.

He said profits from the enlarged Wilmar would compensate for the loss in income from the plantations division.

The PPB Group will book profits from Wilmar beginning the second quarter ending June 30. It will also realise a one-time net gain of about RM6bil in the current financial year ending Dec 31.

For the first quarter, Wilmar posted a net profit of US$26mil (RM88mil), up 66% from US$15.7mil a year earlier. Revenue jumped 41% to US$1.53bil from US$1.09bil before. Earnings per share was sharply higher at US$1.03 versus 72 cents previously.

Wilmar will book profits from the acquired assets from July.

Source: The Star Online