PPB Group Berhad (PPB)’s 1Q18 CNP at RM198m is below expectations at 18% of consensus and 16% of our forecast due to softer Grains margin and unrealised forex loss affecting its associate Wilmar’s net profit. No dividend was announced, as expected. We trim FY18-19E CNP by 7-3% to RM1.13-1.19b. Maintain OUTPERFORM with lower TP of RM22.30 (from RM22.60).

1Q18 CNP below expectations. 1Q18 CNP at RM198m came in below expectations, making up 18% of consensus’ RM1.10b forecast and 16% of our RM1.22b estimate due to lower Grains & Agribusiness (Grains) segment PBT margin at 4.6% (vs. 1Q17’s 7.5%) and lower net profit contribution from associate Wilmar at USD203m (vs USD342m in 1Q17), as Wilmar was hit by severe forex translation loss of USD113.0m. No dividend was announced, as expected.

Weaker key segment margins. YoY, 1Q18 CNP declined 44% as Wilmar’s contribution halved due to heavy forex losses. Excluding Wilmar, PBT declined 34% to RM63.7m led by weaker Grains contribution (-31%) on higher raw material costs. Film exhibition and distribution (Film) segment saw weaker PBT (-37%) on a weaker Chinese New Year film line-up. Consumer Products segment PBT declined 15% against the 1Q17 core PBT (ex-one off land sale gain of RM8.0m) on lower agency sales. QoQ, CNP declined 49% on lower Wilmar’s contribution (-57%) due to forex impact. Excluding this, PPB’s own PBT rose 31% led by improving Grains margin on better flour mill utilisation. Film segment PBT rose 13% on better seasonal ticket sales, and Property segment PBT improved 47% on higher project management income.

Consumption to improve. Management noted that the impending zero-rating of GST should provide “impetus for growth in domestic consumption”, which would be favourable to PPB’s Grains, Consumer Products and Film segments. The Film segment is expected to be supported by a stronger movie line-up for the rest of the year, while its Property segment is focusing on its newly launched Taman Megah high- rise project. Meanwhile, its associate Wilmar should see improvement in its Tropical Oils earnings with better yields, lower input cost and stronger biodiesel demand ahead. However, Chinese tariffs on US soybeans could lead to utilisation risk in Wilmar’s crushing plants.

Trim FY18-19E CNP by 7-3% to RM1.13-1.19b to account for higher raw material cost in the Grains segment.

Reiterate OUTPERFORM with lower TP of RM22.30 (or RM18.60 on ex-bonus basis) from RM22.60 after updating our joint Sum-of-Parts between PPB and Wilmar. Base year is unchanged at average FY18- 19E. We value our Grains & Consumer Products segment at 22.5x representing a 10% discount to QL’s Fwd. PER of 25.0x; Palm Plantation segment at 25.5x, or in line with the large-cap plantation average; Film segment at 22.0x, or in line with Consumer Retail peers; Sugar at 18.0x, or in line with MSM valuation, and other segments at book value. We reiterate our OUTPERFORM call on PPB with highlight include: (i) the upcoming 1-for-5 bonus issue (targeted for 3Q18), (ii) own earnings growth from expansions across its key segments, and (iii) the upcoming listing of Wilmar’s China business (targeted for FY19-20). The listing could potentially benefit PPB as Wilmar management has indicated the likelihood of a special dividend payout post listing.

Risks to our call include: weaker-than-expected consumer demand, higher-than-expected raw material cost, and delays in Wilmar’s listing of China businesses.

Source: Kenanga Research - 01 Jun 2018