Investment Highlights

• We maintain HOLD on PPB Group with a lower fair value of RM19.77/share vs. RM21.03/share previously. Our fair value of RM19.77/share is based on a FY22F PE of 18x (vs. 22x previously) and a 3% premium for a 4-star ESG rating. We have applied a 15% discount to the average FY22F PE of the consumer sector (excluding Nestle and QL Resources) of 21x. The discount reflects the smaller size of PPB’s consumer operations, excluding the contribution from Wilmar International.

• We forecast a PBT of RM141.6mil (FY20: RM161.8mil) and PBT margin of 4.3% (FY20: 5.2%) for the grains and agribusiness in FY21F. On a quarterly basis, we believe that PPB’s grains and agribusiness division would record a lower pre-tax profit (PBT) in 2QFY21 as 1QFY21’s net fair value gains on derivatives may not be repeated.

• We believe that the higher costs of wheat, corn and soybean would squeeze PBT margin in 2QFY21. At the same time, selling prices of most flour and poultry products have not gone up in tandem with production costs.

• On a positive note, prices of soft commodities have been softening since the middle of June 2021. This should help support PBT margins in 2HFY21.

• Recall that the grains and agribusiness division recorded a PBT of RM89.3mil in 1QFY21 (1QFY20: RM29.3mil) and PBT margin of 10.3% (1QFY20: 3.6%) partly on the back of fair value gains of RM48.3mil on derivatives.

• We forecast a smaller pre-tax loss of RM114.3mil for the film exhibition and distribution business in FY21F vs. RM122.5mil in FY20. Although there is a risk of a higher number of days of shutdown in FY21F, losses may be smaller as a number of blockbuster movies are expected to draw movie-goers in 4QFY21. Staff costs are also envisaged to be lower in FY21F. New movies that are expected to come out in 4QFY21 include Top Gun: Maverick, The Matrix 4 and Dune.

• We forecast PPB’s consumer division to record a flattish PBT of RM33.9mil in FY21F. We believe that the consumer division would turn around in 2QFY21 after recording a pre-tax loss of RM1.2mil in 1QFY21. We reckon that lower Covid-19 expenses would contribute to the return in profitability in 2QFY21.

• We estimate PPB’s gross DPS to be lower at 35 sen in FY21F vs. 46.0 sen in FY20. We do not expect 18%-owned Wilmar International to repeat the payment of a special dividend in FY21F. The gross DPS of 35 sen in FY21F implies a net payout of 37.6% (FY20: 49.8%) and a yield of 1.9%.

Source: AmInvest Research - 28 Jun 2021