Investment Highlights

• We maintain BUY on PPB Group with an unchanged fair value of RM19.40/share, based on an FY24F PE of 15x, which is just slightly higher than its 2-year average of 14x. We ascribe a neutral 3-star ESG rating to PPB.

• PPB is expected to be a net beneficiary of a strong USD as its share of earnings in 18.8%-owned Wilmar International are translated to MYR from USD. We estimate that a 10 US$ cent increase in the exchange rate would raise PPB’s net profit by 2%. Currently, we are assuming an average exchange rate of US$1.00: RM4.45 for FY23E. Wilmar accounts for more than 80% of PPB’s pre-tax profit.

• We believe that the grains and agribusiness division would perform well in FY23E after being affected by high costs of wheat in FY22. According to Bloomberg since the start of the year, the price of soft red winter wheat has declined by13% to US$6.88/bushel currently.

• We understand that in contrast to palm oil, El Nino would not have a significant impact on wheat production. Hence, higher supplies (barring unfavourable weather conditions) in Russia, Canada, and Australia may exert pressure on prices in 2H2023. Risk is the non-renewal of the Black Sea Grains Export Corridor, which will expire at the end of July 2023.

• We forecast a larger pre-tax profit of RM144mil for the division in FY23E vs. RM0.1mil in FY22. This is within prepandemic levels of RM110mil to RM162mil per year from FY17 to FY19. Incidentally, PPB’s flour operation in Malaysia no longer faces a shortage in labour.

• We expect earnings of the film exhibition and distribution division to pick up over the coming quarters. Recall that the unit recorded a pre-tax loss of RM25,000 in 1QFY23, dragged by higher cost of wages and a lack of blockbuster movies.

• The release of summer blockbuster and local movies such as Mission Impossible – Dead Reckoning Part 1 in 2QFY23 and Malbatt: Misi Bakara in 3QFY23 are expected to boost cinema patronage and revenue yields. We estimate a pre-tax profit of RM62mil for the film exhibition and distribution unit in FY23E compared to a loss of RM17mil in FY22.

• We forecast a lower pre-tax profit of RM23mil for the consumer products division in FY23E vs. RM36mil in FY22. Although there is risk that consumer spending may be affected by higher interest rates in Malaysia, we believe that demand for staple products such as bread would remain resilient.

• PPB is currently trading at an attractive FY24F PE of 12x, which is lower than its 2-year average of 14x.

Source: AmInvest Research - 19 Jun 2023