• PPB Group has proposed to dispose its 51% stake in PT Pundi Kencana for Rp290.7bil (RM87.5mil) to PT Sentratama Niaga Indonesia and PT Wilmar Nabati Indonesia.

• PT Pundi Kencana owns and operates a 2,000 tonnes per day flour mill in Cilegon, Indonesia. PPB said that the flour milling business in Indonesia is highly competitive. Over the longer-term, a single stand-alone flour mill in Indonesia would not provide any competitive advantage to FFM’s flour milling business. FFB does not have plans to expand operations in Indonesia.

• We view the proposed disposal positively as it is difficult for PT Pundi Kencana to compete with the bigger flour millers in Indonesia such as Bogasari. We do not expect PPB’s profits to be significantly affected by the proposed disposal of PT Pundi Kencana as it is not a major earnings driver. More than 80% of PPB’s pre-tax profits come from Wilmar International.

• PPB is estimated to record a gain of RM24.8mil from the disposal of PT Pundi Kencana. This is a slight 1.3% of PPB’s FY23E net profit of RM1.9bil. The proposed disposal is expected to be completed in 3QFY23.

• We believe that the selling price is fair. The disposal consideration implies a PE of 14.1x based on PT Pundi Kencana’s FY22 net profit of RM12.2mil. It also implies a Price to Net Asset multiple of 1.1x. The replacement cost is about RM260/tonne.

• We maintain BUY on PPB Group with a fair value of RM19.40/share, based on a FY24F PE of 15x, which is slightly higher than its 2-year average of 14x. PPB is currently trading at a FY24F PE of 13x, below its 2-year average.

Source: AmInvest Research - 14 Aug 2023