PPB Group Berhad (PPB) is a well-established and diversified conglomerate in Malaysia. In our view, the typical strong attributes of a consumer staple stock, stable but decent EPS growth, are found in PPB, which should continue to benefit from favourable demographics. In our view, PPB is a well-run company, with a good profit track record and direct exposure to one of the leading global agricultural business through its 18.5% stake in Wilmar. We initiate coverage on PPB with a HOLD rating and DCF-based TP of RM19.50.

Potentially Benefitting From Rising Disposable Income

Well positioned in the agricultural and consumer segments, we expect PPB to benefit from rising disposable incomes in Malaysia, potentially leading to growth in food consumption as well as an increase in leisure spending (ie, higher cinema admissions). This should help to increase revenue contribution for PPB’s core businesses (92% of revenue).

Exposure to a Leading, Global Agribusiness Company

PPB owns an 18.5% stake in Wilmar International (Wilmar; WIL SP, SGD3.69, Buy [1]), a leading global agribusiness listed on the SGX. Wilmar is the world’s largest processor and merchandiser of palm and lauric oils, a leading soybean crusher in China, one of the largest flour millers globally, the largest producer of consumer pack edible oils and a leading consumer pack sugar manufacturer in Australia. PPB’s bottom line is highly dependent on Wilmar, which represents c.65-75% of PPB’s PBT.

Core Earnings Likely to Rebound in 2019E

We expect PPB’s 2019-21E core net profit to increase by 2-8% yoy to RM1.16-1.3bn, on the back of improving earnings from the core divisions of grains & agribusiness, film exhibition & distribution, environmental engineering & utilities as well as from its associate Wilmar.

Initiating Coverage With a HOLD Rating and TP of RM19.50

We believe PPB’s strong financial position and prudent debt management will help the group to continue to expand and grow its core businesses locally and regionally. Our DCF-derived 12-month target price for PPB is RM19.50, which implies a 24x 2019E PER. With 4% upside potential to our TP, we initiate coverage on PPB with a HOLD call. Upside/downside risks would be higher/lower consumption of food products, substantial movements in raw material and labour costs as well as a sustained rebound/plunge in edible oil prices.

Source: Affin Hwang Research - 18 Apr 2019