We attended PPB Analysts’ Briefing, which was well attended by about 30 pax and came away feeling neutral on its prospects with no surprises. During the meeting, the management shared the followings: (i) its key segments would see mixed impact from GST with stronger effect on its film and property divisions, (ii) their new Pasir Gudang feed mill should be completed by 2017, adding to their 19,750 metric ton (MT)/day capacity, and (iii) the film segment sees good prospects targeting 11 new cinemas by 2017 (+35% from current 31). On its Puteri Harbour project, despite management’s optimism, we are neutral and expect limited PBT contribution (+2%). We maintain our MARKET PERFORM call on PPB with unchanged TP of RM15.42 based on 19.5x Fwd FY15E EPS of 79.1 sen. Mixed impact from GST.

During the briefing, management viewed that the GST to be implemented on 1-Apr-15 will have mixed effect on their key divisions. The “Environmental engineering, waste management & utilities” (Engineering) division (1% of FY14A PBT) and “Flour and feed milling, and grains trading” (FFM) division (17% of PBT) is likely to see minimal impact as the costs should be passed on to customers. The film exhibition and distribution (FILM) business (6% of PBT) expects a temporary drop in admissions immediately after implementation, but due to a strong film line-up, they expect sales to normalize later in 2H15. The film division also mentioned that they are working with the government to reduce the 20% entertainment tax on movie tickets to partly offset the hike in ticket prices. The property division (4% of PBT) thinks that the property sector downturn is likely to continue but due to lower launches and hence lower supply, property prices could rise post-GST. Overall, we agree with management’s management's view that consumer sentiment is likely to weaken in 2Q15 but things should improve in 2H15 as the strong job market and low crude oil prices should be positive for consumer spending. However, note that these segments contributed only 31% of FY14 PBT, with the balance coming from their 18.3% stake in Wilmar.

Expecting completion of feed mill by 2017. Recall that the FFM division acquired 2.3ha of land in Pasir Gudang, Johor next to its existing plant to expand its feed milling activity. Management also updated that the plant construction is on track for completion in 2017. Also, their recently completed Vietnam flour mill has started operations, which should increase milling capacity by 500 metric tons (MT)/day to total 19,750MT/day. Note that the FFM division contributed 8% of FY14 PBT. We are neutral on the new plant capacity as we believe that FFM division’s earnings is very much dependent on the pricing of wheat (as input cost). Hence, the revenue growth expected from higher capacity may not translate directly to bottom line. Furthermore, we gather from management that production may take some time to be ramped up and profitability would be satisfactory only after 4-5 years of operation.

Good prospects in FILM segment. We gather that the FILM division is targeting 11 new cinemas by 2017 for a total of 42 locations (from 31 currently). YTD, the company has already opened 3 new cinemas (Nu Sentral, IOI Putrajaya and Ipoh Parade) and the company plans to open another 3 at locations in Alor Setar, Bintulu and Klang Parade in 2015. We think the targeted 11 new cinemas by 2017 should be fully achievable as 6 locations (or 55%) of the target 11 locations should be completed in 2015. We are positive on the film division’s prospects due to the 35% growth by 2017. However, in the near-term, weaker consumer sentiment due to GST could limit demand in 2Q15.

Expecting limited PBT contribution (2%) from Puteri Harbour project. Management has updated that PPB’s 28% owned associate Southern Marina Development (SMD) has seen 50% take-up rate in its Puteri Harbour project, mostly by local buyers, during their soft launch phase. We gather that there will be 456 units offered in Tower 1 and Tower 2, and prices start from RM880/sf. Management has mentioned that unbilled sales are currently at about RM150m. While management acknowledged that the Johor property market is overall soft, they are positive on Puteri Harbor due to its strategic location (next to UEM’s private marina) and attractive pricing. However, we are neutral on the impact of the project as we believe its contribution to PPB’s FY15 PBT should be limited at RM17m or 2% assuming 20% PBT margin.

Maintain MARKET PERFORM on PPB with TP of RM15.42 based on unchanged Fwd. PER of 19.5x on FY15E EPS of 79.1 sen. Our Fwd. PER of 19.5x is based on 3-year historical mean valuation. No change to our FY15-16E CNPs at RM937m- RM988m. We think upside is limited due to flattish CNP growth prospects (+2% in FY15E). Meanwhile, downside risk to our call is lower-than-expected earnings from Wilmar or PPB’s core business divisions. 

Source: Kenanga