• PPB’s earnings to continue to improve in 2021 as the global economy progressively re-opens and demand for consumer products improves
• Wilmar will still be the substantial contributor to the overall profitability of PPB (accounting for 87.4% of PPB’s total PBT in 2020)
• Upgrading PPB to BUY Rating, Raising TP to RM21.50 (from RM19.70)

Focus on Recovery in 2021

The grains & agribusiness division is anticipated to weather the volatile commodities market (eg, wheat, soybean, corn and palm oil) this year, while its production and distribution of staples food sub-division is expected to improve, underpinned by extensive country wide marketing and distribution network.

We expect PPB’s consumer products division’s revenue to increase in 2021 due to a recovery in demand for food products as the global economy progressively reopens, coupled with sales expansion into the food service channel and e-commerce.

Film exhibition & distribution division’s earnings are likely to gradually recover as Covid-19 cases are brought under control. After MCO 2.0, cinemas are now allowed to re-open, since 5 March 2021, at 50% capacity. We believe GSC’s acquisition of MBO Cinemas’ assets is a strategic move by the Group to increase their leadership position in the Malaysian cinema market as the industry starts to recover in 2021. For environmental engineering and utilities, we believe 2021E earnings will improve as PPB continues to focus on replenishing its order book and exploring new project opportunities. Meanwhile, the property division should gradually improve over time after being adversely impacted by the Covid-19 pandemic.

Wilmar’s resilient business model has proven to be effective and we expect earnings to continue to grow, underpinned by a higher contribution from its China operations, complementary businesses widening their range of food product offerings and continued recovery in hog farming in China to improve its manufacturing margins.

Upgrade PPB to BUY With a New TP of RM21.50

Historically, Wilmar traded at a 17% PE discount to PPB; however, this has reversed. PPB’s valuation discount could be due to the weak performance of its core operations, although with the re-opening of economies and improving prospects, we think that PPB’s PE valuation multiples will likely re-rate. We upgrade PPB to a BUY and raise our TP to RM21.50 (based on lower WACC of 6.6%), which implies a 21.3x 2021E PE (currently trading at 18.5x 2021E PE), and looking more attractive than Wilmar’s 21.8x 2021E PE.

Source: Affin Hwang Research - 15 Mar 2021