We take a closer look at our valuation of PPB, as consumer-based segments take greater precedence in PPB and Wilmar’s earnings contribution (63% of FY17A earnings). We also observe that PPB market value has not caught up to recent appreciation in book value, and indeed lags behind its associate Wilmar. OUTPERFORM call reaffirmed as we up our TP to RM22.60 (from RM19.85) on upgrade of our valuations into Sum-of-Parts.

A multi-national consumer heavyweight. We take a deeper look into PPB and its associate Wilmar as we review our valuations in view of the rising significance of Wilmar’s non-plantation segments. We observe that consumer-related segments (including respective Grains segments for both companies), made up >50% of both PPB and Wilmar’s operating profit. Combined, we find that consumer-related segments (Grains, Film) made up 63% of PPB and Wilmar’s FY17A joint adjusted earnings. Along with the fact that PPB is listed as the second largest consumer company in Bursa Malaysia Consumer index after NESTLE, we believe that PPB is more appropriately positioned as a major player in the consumer space with substantial market positions for consumer F&B in China, India, Australia and South-East Asia by way of both its own and Wilmar’s operations.

Consumer-based valuations. Valuations-wise, we believe that the new Grains & Consumer Products segment (please refer overleaf for details) aligns more closely with the agribusiness firm - QL, in terms of earnings growth (10% vs. QL’s 12%) and ROE (8% vs. QL’s 11%). While PPB’s Grains & Consumer Products operations scale larger (RM14b value vs. QL’s RM6b market cap), we note slimmer EBIT margins (5% vs. QL’s 9%), leading us to impose a small 10% discount to QL’s Fwd. PER for an assigned Fwd. PER of 22.5x. Meanwhile, we also categorize PPB’s Film segment as a consumer business under the retail sub-segment, on par with the average business value (c.RM1.5b value vs. average RM2.1b), EBIT margin (11% vs. average 9%), earnings growth (34% vs. average 31%) despite softer ROE (16% vs. average 54%). Thus, we assign a Fwd. PER of 22.0x to the Film segment, in line with the retail average. Our combined Sum-of-Parts (SoP) gives an indicative business value of RM30.5b, to which we apply a conglomerate discount as explained below.

Unjustified discount to book value. We apply a 10% conglomerate discount to our valuation, which is a conservative take on PPB’s 3-year average market cap discount to book value of 7%. We note, however, that prior to a forex revaluation in 2015, PPB’s market cap had been trading at a premium to book value (8-year average premium of 13%), and in our view, the market has failed to catch up to PPB’s continued net asset appreciation in recent years, compounded by an increase in the value of PPB’s Wilmar holdings in tandem with appreciation in SGD/MYR. We also point out that Wilmar is currently trading at 1.3x PBV against PPB’s 1.0x PBV which we think is similarly unjustified.

Maintain FY18-19E CNP at RM1.22-1.23b as we expect no significant earnings changes over the medium term.

Reiterate OUTPERFORM with higher TP of RM22.60 (from RM19.85) as we change our valuation basis from 19.2x Fwd. PER to joint-SoP of PPB and Wilmar, better reflecting the firm’s consumer F&B focus. Base year is unchanged at average of FY18-19E. Our segment valuation bases are explained above. We believe that the market has yet to fully incorporate the significance of PPB’s consumer sector exposure, and therefore, re-emphasise our OUTPERFORM call on the stock. Risks to our call include weaker-than-expected Wilmar earnings performance, slower-than-expected rollout of internal expansions, and potential commodity price volatility.

Source: Kenanga Research - 23 Mar 2018