Post-meeting, we turned cautious on its near-term outlook, mainly due to shaky commodity prices and consumer demand in key segments. Still, the group is supported by growth in the film and engineering segments. We revise our FY18E/FY19E earnings by -4.9%/+1.7%, while also rebasing our SoP valuation benchmarks. With this, we downgrade it to MP with a lower SoP-driven TP of RM16.60 (from RM18.35).

Challenging grains supported by agribusiness. Higher wheat prices drove the input costs for the group’s key grain and flour milling operations. Management did not express any intention of passing down the higher cost to its customers but aim to leverage on greater operating efficiency to manage costs. On the flipside, the group’s livestock business appears stable thanks to its dependency on corn products which prices were less volatile. We believe that the current mix should enable the segment to remain sustainable assuming there are further pressures from wheat prices in the medium term, backed by strategic hedging positions.

Consumer products under pressure. Despite stronger consumer sentiment, the segment’s decline in sales was possibly attributed by unfavourable economic conditions (i.e. weaker ringgit) affecting agency distributions and consumption of in-house products, while profits, particularly from the bakery division was undermined by the abovementioned higher wheat prices. We suspect the prevailing landscape may plateau further as conditions appear to be stagnating from lack of positive development.

On the bright side, the group’s Film segment benefited from more location openings since 2017 (YTD: 35 locations in Malaysia) and upgrades to existing cinemas. Future openings (i.e. EkoCheras Mall) will expand its reach and should contribute positively, particularly in location with high footfalls. On the other hand, the group’s environmental engineering and utilities segment prospects will be driven by greater tender opportunities in their focused water treatment and sewage systems capabilities. This would work well for the group, given that a typical contract period is estimated to last up to 24 months.

Post-meeting, we take a more cautious stance, primarily on the two key segments of the group, being: (i) the grains and agribusiness, and (ii) consumer products. While the Film segment is still expected to demonstrate growth, we tone down our optimism in lieu of weaker consumer consumption seen across other segments. Hence, we trimmed our FY18E earnings by 4.9%. However, we are hopeful for signs of recovery in the medium term from normalising cost environments, also backed by better engineering returns. This translates to a slight increase in our FY19E earnings by 1.7%.

Downgrade to MARKET PERFORM (from OUTPERFORM) with a lower SoP-driven TP of RM16.60 (from RM18.35, previously). In addition to changes to our FY18E/FY19E earnings assumptions, we also rebased our SoP benchmarks (mainly on the grains and consumer segments) while we leave the lesser contributing segments unchanged (refer to the overleaf for the details in our rebased valuations). Although the stock could be seeing softer fundamentals in the near term, the upcoming listing of Wilmar’s China business (targeted for FY19-20) could potentially benefit PPB from the possibility of special dividends being paid out by Wilmar post listing.

Risks to our call include: (i) weaker/better-than-expected crush margin, (ii) swings in commodity price trends, (iii) lower/better-than-expected biodiesel quota volumes, and (iv) weaker/better-than-expected movement in consumer demand.

Source: Kenanga Research - 14 Dec 2018