Investment Highlights

• We maintain BUY on PPB Group with an unchanged fair value of RM19.30/share. Our fair value for PPB is based on a FY23F PE of 15x. We ascribe a 3-star ESG rating to PPB.

• PPB’s annualised 1HFY22 net profit was 33.3% above our forecast and 30.5% above consensus estimates. The earnings turnaround in PPB’s grains and agribusiness in 2QFY22 was stronger than expected. Hence, we raise PPB’s FY22E net profit by 20.4% to account for higher earnings from the grains and agribusiness and a lower effective tax rate of 3% vs. 6% previously.

• The grains and agribusiness division recorded a pre-tax profit of RM84.5mil in 2QFY22 in contrast to a pre-tax loss of RM161mil in 1QFY22. The earnings turnaround in 2QFY22 was partly contributed by net fair value gains on derivatives of RM46.1mil (1QFY22: Fair value loss of RM188mil). Pre-tax profit margin of the division improved to 7.3% in 2QFY22 from -15% in 1QFY22.

• Comparing 1HFY22 against 1HFY21, the grains and agribusiness division recorded a pre-tax loss of RM76.5mil vs. a pre-tax profit of RM1.4mil. The division was affected by high wheat costs and fair value losses on derivatives in 1QFY22. Although the grains and agribusiness division raised selling prices of flour products in 1QFY22, this was not enough to mitigate the erosion in operating profit margin.

• The film exhibition and distribution unit registered a smaller pre-tax loss of RM7.4mil in 1HFY22 compared to RM58.6mil in 1HFY21. Recall that cinema operations were not allowed to operate during the Covid-19 lockdown in FY21. On a positive note, the division sung into a pre-tax profit of RM21.3mil in 2QFY22 from a loss of RM28.7mil in 1QFY22 on the back of higher number of cinema patrons.

• The consumer products division chalked up a pre-tax profit of RM14mil in 1HFY22 vs. RM0.9mil in 1HFY21 supported by higher sales of bakery products. Also, 1HFY21 was affected by Covid-related expenses, which squeezed operating profit margins. On a quarterly basis, the division’s pre-tax profit edged down to RM6.9mil in 2QFY22 from RM7.1mil in 1QFY22.

Source: AmInvest Research - 26 Aug 2022