RESULTS

• Result below expectations. PPB Group (PPB) reported 1Q18 core net profit of RM190m (-49.6% qoq, -42.6% yoy). Core net profit was below expectations due to weaker-than-expected performances at its core businesses. Operating margins were also weaker despite revenue coming in within our expectations. Associate Wilmar International (Wilmar) did not do as well too.

• Weaker qoq net profit due to weaker contribution from Wilmar. EBIT dropped 49.6% qoq in 4Q17, mainly due to weaker contribution from Wilmar (-54.1% qoq). Meanwhile, all core segments reported improved qoq EBIT, except for environmental engineering & utilities which EBIT declined 45.9% qoq.

• Lower yoy earnings in 1Q17. All core businesses reported weaker yoy EBIT yoy except for environmental engineering & utilities. Film exhibition & distribution and grains & agribusiness registered the largest yoy declines in EBIT. Film exhibition & distribution was dragged down by losses incurred from film distribution as Chinese New Year titles did not perform to expectations. Grains & agribusiness was affected by higher raw material costs which led to lower margins. Associates’ contribution was also weaker yoy.

IMPACT

• Expect stable contribution from core businesses. We forecast earnings from the grains and agribusiness, cinema operation and consumer products segments to grow 5-6% yoy for 2018. The grains and agribusiness segment will focus on export-oriented customers as well as the local consumer market for growth. The consumer products segment is expected to benefit from the reduction in the GST to zero-rate from 1 Jun 18 which should stimulate domestic consumption. Cinema operations will be supported by a stronger movie line-up in Malaysia and Vietnam. Meanwhile, the property and environmental engineering and utilities segments will focus on timely completion of on-going projects. Nevertheless, group earnings will continue to be highly dependent on Wilmar.

• Remains positive on Wilmar. We maintain our positive view on Wilmar despite its 1Q18 earnings missing our expectations. We expect earnings to pick up in the next two quarters. (Refer to our Wilmar report dated 14 May 18 for more details)

EARNINGS REVISION

• Cut earnings estimates. We cut our 2018-20 net profit estimates by 11.6%, 12.1% and 4.6% respectively to factor in our adjustment to Wilmar’s earnings on weaker sugar margins as well as lower margins for all core segments in 2018. We now expect net profits of RM1,051m, RM1,167m and RM1,331m for 2018-20 respectively.

RECOMMENDATION

• Maintain HOLD with a lower SOTP-based target price of RM16.90 (from RM17.45), factoring in a lower fair value of S$3.90 for Wilmar (from S$4.10). Our SOTP-based target price is based on 25x 2019F PE for the grains & agribusiness and film exhibition & distribution segments, 12x 2019F PE for the consumer products segment, 10x 2019F PE for the environmental engineering & utilities segment, 8x 2019F PE for the property segment, and fair value for its 18.3% stake in Wilmar and 14.0% stake in Maybulk. Our target price implies 17.2x 2019F PE. Entry price is RM16.00.

• PPB’s share price has risen 16.6% ytd. Despite the strong share price rally, maintain HOLD. As PPB is a consumer-related stock, it is likely to benefit from the reduction in GST to zero-rate from 1 Jun 18. Moreover, we are positive on Wilmar’s outlook and the potential listing of its China operations in 2019 is likely to bring in special dividends for PPB. PPB is also a defensive play as historically, it outperformed the market in times of high volatility.

Source: UOB Kay Hian Research - 1 Jun 2018