We attended PPB's 1H16 Analysts' Briefing, which was well attended by about 40 participants. Generally, we returned with our weak near-term outlook intact – despite stable prospects in the Grains and Film segments, Engineering and Property continue to be affected by weaker contracts and poor market sentiment, respectively. Short-term earnings will be dragged by Wilmar’s weak 1H16 performance, which we have accounted for. Maintain UNDERPERFORM and TP of RM15.00.

Better 2H16 for Grains. Management expects the Grains and Agribusiness (Grains) segment to record better performance in 2H16 than 1H16 in line with previous years’ trend. We concur as forecasters are expecting strong US and Australian wheat harvest, which could dampen wheat prices and improve Grains margins in 2H16. Longer-term Grains outlook should improve with expansions planned in Malaysia, China and Vietnam mills over the next 1-2 years.

Film pickup from 4Q16. With no new locations scheduled for 2016, we expect slower Film segment earnings growth in 3Q16, with a stronger pickup in 4Q16 due to new screens in its Mid Valley cinema and year-end film lineups. FY17E onwards should see better growth in Film earnings with five new locations planned, and another three locations in FY18-19E. Meanwhile, overseas expansion is progressing as planned with new cinemas in Hanoi and Da Nang (Vietnam) commencing in 3Q16. However, overseas contribution is expected to remain small in the near future compared to Malaysian operations.

Engineering and Property to develop slowly. We gather that Engineering outlook remains subdued on smaller outstanding orderbook (RM132m from RM210m as of end-FY15). Property demand remains soft due to the slow Johor property market, although we note the company is diversifying its portfolio with a recent 5.8-acre Penang land purchase and plans to redevelop the New World Park in Penang. The company also expects higher rental reversion at Cheras Leisure Mall on plans to refurbish and adding a link-bridge to the upcoming MRT station in early-FY17.

Subdued Wilmar outlook. We expect soft 9M16 performance from Wilmar as 1H16 substantial Oilseed and Grains (O&G) losses and weak Sugar performance limit an expected improvement in 3Q16. Plantation outlook is also subdued on yearly production decline (FY16E: -15%). As PPB’searnings are contingent on Wilmar’s performance, we expect earnings recovery only by yearend, given Wilmar’s 1H16 setback in its O&G and Sugar businesses. For now, we keep earnings unchanged.

Maintain UNDERPERFORM and TP of RM15.00. We maintain our TP at RM15.00 based on unchanged Fwd. PER of 19.5x applied to FY17E EPS of 76.7 sen. Our applied PER is maintained at 19.5x which implies a 3-year mean valuation. This reflects our neutral outlook on PPB’s core businesses with stable Grains and Film prospects offset by soft Property and Engineering outlook. Meanwhile, we think 3Q16 could be a soft quarter given Wilmar’s 1H16 setbacks and subdued Plantation outlook. Hence, we reiterate our UNDERPERFORM call on PPB.

Source: Kenanga Research - 1 Sep 2016