Investment Highlights

• We upgrade PPB Group to BUY from HOLD with a higher fair value of RM19.90/share vs. RM17.60/share previously. Our fair value for PPB is now based on FY23F PE of 15x instead of FY22E. We also attach a 3% premium for a 4-star ESG rating.

• We raise PPB’s FY22E net profit by 10.6% to account for stronger cinema earnings and a weaker MYR vs. USD exchange rate of US$1.00: RM4.30 vs. US$1.00: RM4.15 originally. PPB benefits from a depreciating MYR as earnings from Wilmar International are translated from USD to MYR.

• We expect PPB’s operating profit (excluding Wilmar) to be RM218.4mil in FY23F compared to a loss of RM78.3mil in FY22E. The turnaround in FY23F is envisaged to besupported by softer raw material costs and higher cinema earnings.

• We believe that PPB’s operating profit would improve in 2HFY22. Recall that the grains and agribusiness division was affected by high wheat costs and derivative losses of RM188mil in 1QFY22. The film exhibition and distribution unit was hit by poor attendances as Covid cases surged in 1QFY22.

• We forecast the grains and agribusiness division to record a smaller pre-tax loss of RM33mil in the remaining quarters of the year compared with RM161mil in 1QFY22. The improved earnings of the division in 2HFY22 are anticipated to be underpinned by lower prices of wheat, soybean and corn.

• According to Bloomberg, the price of soft red winter wheat slid by 39.3% to US$7.77/bushel on 15 July from a high of US$12.78/bushel on 17 May. US soybean price has weakened by 12.7% to US$14.66/bushel from the peak of US$16.79/bushel.

• We envisage a pre-tax profit of RM34.9mil for the film exhibition and distribution unit in FY22E vs. a pre-tax loss of RM105.3mil in FY21 (1QFY22: pre-tax loss of RM28.7mil). Increased ticket admissions supported by the release of blockbuster movies would more than offset higher operating costs in FY22E. Costs of F&B supplies are anticipated to increase by 5% to 10% in FY22E.

• The film exhibition and distribution unit is expected to open 42 screens at 4 locations in FY22E. We estimate the capex to be RM63mil in total. The new screens would be located in BBCC KL, IOI City Mall Putrajaya, Spring Bintulu and Sunway Iskandar Johor.

• The hike in Malaysia’s minimum wage to RM1,500/month from RM1,200/month is not anticipated to affect PPB significantly. Most of PPB’s workers are paid above RM1,500/month.

Source: AmInvest Research - 28 Jul 2022