Maintain HOLD on PPB Group Bhd, whose 4QFY11 results werewithin expectations and consensus estimates. We have slashed PPB's FY12Fearnings forecast due to a weak operating margin in the grains, trading andflour division, and reduced profit contribution from 18%-owned associate,Wilmar International. 

PPB's pre-tax profit declined 6.6% YoY to RM1.06bil in FY11.Share of profits in Wilmar only improved by 5.5% YoY to RM814.6mil in FY11.

Recall that Wilmar was affected by low palm oil refining marginin Malaysia and soybean crushing margin in China in 4QFY11. The group'soilseeds and crushing division recorded a pre-tax profit of only US$1.7mil in4QFY11.

PPB's share of Wilmar's profits was also affected by a strongUS$/RM exchange rate in FY11. The Ringgit strengthened by 5% from an average ofUS$1.00:RM3.2191 in FY10 to US$1.00:RM3.0585 in FY11. 

PPB has declared a final gross DPS of 13 sen single-tier, whichbrings total gross DPS to 23 sen single-tier in FY11 (FY10: 88 sen). The totalgross DPS of 23 sen translates into a yield of 1.3% in FY11. Dividend paymentswere high in FY10 due to surplus cash received from the disposal of the sugarbusiness. Only consumer products and environmental engineering divisionsrecorded profit growth in FY11. Although revenue of the flour division climbed29.8% YoY to RM1.6bil in FY11, EBIT fell 12.9% to RM135mil. 

EBIT margin of the flour division weakened from 12% in FY10to 8% in FY11 due to an increase in wheat costs. We also reckon that the breadbusiness is not profitable yet. According to Bloomberg, wheat prices rose morethan 12% from an average of US$7.02 1/4/bushel in FY10 to US$7.89 13/16/bushelin FY11.  

Going forward, PPB is expected to benefit from the fall in wheatprices. Wheat price is currently hovering at US$6.67/bushel.

Turnover of the cinema division expanded 12.2% YoY to RM283.3milin FY11. However, EBIT of the division fell 14.9% from RM44mil in FY10 toRM37.4mil in FY11 due to the costs of opening new cinemas and an increase instaff costs. In FY12F, PPB would be opening five to six cinemas.

Source: AmeSecurities