PPB Group Berhad (PPB)’s 1H18 CNP* came in within expectations at RM508m, accounting for 47% of consensus estimate and 45% of our forecast. An interim dividend of 8.0 sen was declared, in line with our expectation. No changes in FY18-19E CNP of RM1.13-1.19b. Maintain OUTPERFORM on PPB with an unchanged TP of RM18.60.

1H18 met estimates. PPB’s 1H18 CNP* came within expectations at RM508m, accounting for 47% of consensus estimate (RM1.09b) and 45% of our forecast (RM1.13b). An interim dividend of 8.0 sen was declared, in line with our expectation. PPB’s own businesses reported PBT (ex-Wilmar) of RM169m, which was broadly within our forecast of RM453m at 37%. Historically, Wilmar’s 1H accounted for an average of 36% of full-year CNP in the past 5 years.

Sturdy Grains performance. YoY, 1H18 CNP improved 13% mainly due to higher contribution from Wilmar (+11%) as well as improved earnings from Grains and Agribusiness (+23%). The improved earnings at Grains and Agribusiness was attributable to increased sales volume from all flour mills, and higher product margin from the animal feed division arising from lower raw material cost. However, this was partially offset by weaker performances at; (i) Consumer Products (- 55%) due to lower contribution in the bakery division, and (ii) Film Exhibition & Distribution (-31%) owing to lacklustre movie line-up during the Chinese New Year 2018 period. QoQ, similarly, 2Q18 CNP surged 56% mainly on higher contribution from Wilmar (+58%) and stronger performance at Grains and Agribusiness (+84%) due to reasons noted above.

Stronger 2H. Looking ahead, PPB should see further improvements in 2H, underpinned by more aggressive promotional campaigns lined up for Consumer Products in 2H. Film Exhibition and Distribution segment is also likely to post greater performance given a stronger movie line-up and contribution from newly-opened cinemas in Malaysia in 2H. Meanwhile, its Property segment continues to focus on its newly launched Taman Megah high-rise project and benefit from improved tenancy in the extended and refurbished Cheras LeisureMall. On Wilmar side, earnings in 2H18 should improve with the commencement of crushing season for its Sugar segment in June. Nevertheless, we note that a drawn-out trade spat between China and US could adversely affect crush margins in the O&G segment due to lower capacity utilisation.

No changes in FY18-19E CNP of RM1.13-1.19b as results came in within expectations.

Reiterate OUTPERFORM on PPB with an unchanged TP of RM18.60 based on the joint Sum-of-Parts between PPB and Wilmar. Base year is unchanged at average of FY18-19E. We value our Grains & Consumer Products segment at 22.5x; 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, in line with MSM valuation, and other segments at book value. PPB is currently trading at +2.0SD above its historical mean, but we still reckon it is undervalued given its substantial discount against QL’s Fwd. PER of 41.9x. We reiterate our OUTPERFORM call on PPB with highlights including: (i) the group’s own earnings growth from expansions across its key segments, and (ii) the upcoming listing of Wilmar’s China business (targeted for FY19-20). The listing could potentially benefit PPB as Wilmar’s management has indicated the likelihood of a special dividend pay-out post listing. Risks to our call include weaker-than- expected crush margin, a crash in commodity prices and lower-than- expected biodiesel quota volumes.

* 1H18 CNP excludes a net forex loss of RM13.3m.

Source: Kenanga Research - 30 Aug 2018