• PPB’s 9M20 core net profit of RM911.8m (+12.9% yoy) came in above our expectations, due mainly to a higher-than-expected contribution from Wilmar
• We raise our 2020-22E core EPS by 9-12% mainly to take into account higher earnings from Wilmar underpinned by improving demand for its food products, a higher level of crushing activities and higher contribution from the plantation and sugar milling segments
• Our DCF-derived 12-month target price is raised to RM19.70 (from RM18.90); we maintain our HOLD rating on PPB

9M20 core net profit at RM911.8m – above our expectations

PPB Group Berhad (PPB) reported a lower 9M20 revenue of RM3.06bn, down 12.7% yoy, mainly attributable to a decline in contribution across all its businesses - grains & agribusiness, consumer products, film exhibition & distribution, environmental engineering and property. The 9M20 EBITDA margin weakened by 2.2ppt to 6.1% mainly due to losses at the film exhibition & distribution and property divisions. However, the group’s 9M20 PBT increased by 15.6% yoy to RM1.02bn, mainly due to higher profit contribution from: 1) grains & agribusiness (due to lower raw material costs and higher contribution from China associates), 2) consumer products (improved performance at the bakery division), and 3) other operations (due to higher profit contribution from Wilmar on the back of strong demand for its food products, higher level of crushing activities as the African swine fever situation in China eased, and better prices achieved at the plantation and sugar milling segments). The film exhibition & distribution and property divisions were loss-making in 9M20 due to the Movement Control Order (MCO) that required the closure of cinemas, and low admissions due to the deferment of movie releases by major distributors coupled with lower mall-related income. After adjusting for one-off items, PPB’s 9M20 core net profit increased by 12.9% yoy to RM911.8m, which came in above our expectation due mainly to the higher-than-expected contribution from Wilmar.

Higher profits from Wilmar boosted 3Q20 earnings

PPB’s 3Q20 revenue was higher by 8.7% qoq to RM1.04bn due to an increase in contribution across all segments except consumer products. The 3Q20 PBT increased by 10.1% qoq to RM429.7m mainly due to an increase in profits from Wilmar and its property division, as well as narrower losses from film exhibition & distribution. Excluding one-off items, PPB’s core net profit increased by 56.6% qoq to RM430.7m in 3Q20.

Maintain HOLD rating on PPB but with a new TP of RM19.70

We raise our 2020-22E core EPS by 9-12% given the stronger-than-expected 9M20 results, especially the higher earnings contribution from Wilmar underpinned by improving demand for its food products, a higher level of crushing activities and higher contribution from the plantation and sugar milling segments. We expect earnings to continue to improve in 2021 onwards as the economy progressively re-opens and demand for consumer products improves. Our DCF-derived target price is raised to RM19.70 (from RM18.90 previously) and we maintain our HOLD rating on PPB.

Key risks

Upside/downside risks to our HOLD rating: 1) stronger/weaker economic growth leading to higher/lower consumption of food products; 2) substantial declines/increases in raw material prices and labour costs; 3) a sustained rebound/plunge in edible oil prices; 4) stronger/weaker economic growth in key export markets increasing/curbing demand; and 5) changes in policies.

Source: Affin Hwang Research - 27 Nov 2020