• PPB Group’s 80%-owned FFM Bhd has entered into: (1) a foreign loan contract with Dongguan Yihai Kerry Oils, Grains and Foodstuffs Industry Co; and (2) a supplemental agreement to a shareholders’ agreement for a proposed increase in FFM’s investment in Yihai Kerry (Shenyang) Oils, Grains and Foodstuffs Industry Co.

• Wilmar International is the 80% shareholder of the two flour companies in China while FFM is the 20% shareholder.

• In respect of the foreign loan contract, FFM will be lending RMB80mil or RM50.2mil to Dongguan Yihai Kerry Oils to part-finance the construction of a 1,900-tonne per hour flour mill. The loan is interest-free and has a tenure of three years.

• In respect of the supplemental agreement to a shareholders’ agreement, PPB through FFM is raising its investment in Yihai Kerry (Shenyang) as the latter’s registered capital has increased.

• As FFM owns 20% of Yihai Kerry (Shenyang), FFM’s share of the increase in Yihai Kerry (Shenyang)’s capital is US$4.4mil or RM17.9mil. Yihai Kerry (Shenyang) is involved in flour milling.

• The above transactions are not expected to be contribute significantly to PPB’s net profit in the short term. Earnings contribution from the flour units in China is reflected in PPB’s share of net profit in associates.

• We estimate that Wilmar accounts for 90% to 93% of PPB’s share of net profit in associates every year while the balance 7% to 10% comes from the 20% flour associates in China and its 40% stake in the Vietnam cinema operator called Galaxy Studio Joint Stock.

• As at 31 December 2019, Wilmar owns 21 flour mills in China with a total milling capacity of more than five million tonnes per year.

• We maintain HOLD on PPB Group with a fair value of RM20.30/share.

Source: AmInvest Research - 3 Feb 2021