08/08/2012 (The Star) - PPB Group Bhd shares have fallen to its 2009 lows, likely a reflection of the troubles brewing at the China operations of its 18.3%-owned unit Wilmar International Ltd, analysts said.

The stock dipped 52 sen, or 2.4%, before recovering slightly to end 34 sen lower at RM13.88, a level not seen since August 2009. Volume spiked six times to 871,400 shares from a day before.

According to PPB’s 2011 annual report, Wilmar contributed to 58.8% of its profit, which could mean an earnings squeeze for its parent shareholder if things pan out badly for the Singapore-listed palm oil giant.

Wilmar is facing a double whammy on its margins, both from high soybean costs as well as the China government’s call three weeks ago for producers of edible oil products to avoid raising prices “unless absolutely necessary”.

Wilmar is the largest producer of consumer pack cooking oil in China with a market share of 50%.

Its consumer products division made up 4.5% of the group’s 20011 pre-tax profit.

However, China stopped short of ordering an outright price cap, which it carried out last year.

The move indicates caution on the government’s part against a rally in food prices after bad weather sent grain prices in the US soaring, although inflation in China has dropped to its lowest since January 2010.

Following this, JP Morgan cut its target price for Wilmar by 35% to S$2.80 from S$4.30 but kept its “neutral” rating, citing a tough outlook caused by high soybean costs.

Soybean price has appreciated more than 40% for the year and is expected to remain high, piling further pressure on Wilmar’s crush margins, the brokerage said.

“We think Wilmar’s share price may trade lower into the upcoming second quarter results,” it said in a report last week, adding that the tough operating environment has yet to be fully factored into consensus earnings estimates.

Wilmar is due to report its second quarter results on Aug 14.

Its stock has tumbled some 34.4% year-to-date, making it the worst performing stock on Singapore’s Straits Times Index.