We came away from PPB’s FY18 results briefing feeling cautious of its near-term prospect. Key segments (grains & agribusiness, consumer products, film exhibition) could see better top-lines but with mixed earnings prospects. High investments are in place to enable sustainable growth opportunities from here. The engineering segment could be supported by higher project bids but property is expected to be slow. Maintain UNDERPERFORM and TP of RM16.60.

Grainy affair. Sales from the grains & agribusiness segment in FY18 improved with a higher demand from food manufacturers, but suffered from higher wheat prices that inflated production costs. While commodity trends are expected to remain volatile, management aims to maintain focus in gaining market share and drive better economies of scale for greater cost savings. Earmarked investments of RM401.0m into China and Vietnam over four years will bolster its presence in these regions.

Stimulating consumption. Revenue from the consumer segment fell short on weaker demand that could have been dampened by soft economic conditions. Additionally, the same abovementioned higher wheat prices could have dragged the segment’s profit. While previous efforts included introducing new products, the group hopes for top-line performance to be driven by a higher distributorship profile backed by a larger product profile. Furthermore, the commissioning of an upcoming halal-certified frozen food production facility in 2Q19 will open up wider market opportunities.

More screenings. The Film segment benefited from better ticket sales, average ticket prices and reception from co-produced movies. Going forward, the segment appears poised to expand with the re-opening of refurbished halls of existing cinemas. Additionally, 2 more location openings (YTD: 36 locations) and the planned refurbishment of other high footfall locations could fuel ticket sales. Up to 9 new cinemas are earmarked to be opened by FY22. While the former two segments are expected to see earnings risks mainly from higher operating costs, we opine that this segment could continue to enjoy stable margins given its leaner operating structure.

Outlook for the environmental engineering & utilities will be driven by a higher order-book of RM320.0m and tender-book of c.RM370.0m. We believe this is mainly for the water treatment and sewage systems. For the property division, growth could be muted by the slow take-up rate of the Megah Rise project, which is expected to be completed by 2021.

Post-meeting, we leave our FY19E/FY20E earnings unchanged, as we believe the abovementioned factors have been sufficiently accounted in our forecasts. The overall challenge of the group is to weather through the challenging macro environment, but we are not overly concerned given the group’s scale and market presence. Additionally, its associate Wilmar is expected to continue contributing c.70% of the group’s PBT, with its earnings looking to improve from recovering soy crush margins.

Maintain UNDERPERFORM with an unchanged TP of RM16.60 based on joint Sum-of-Parts between PPB and Wilmar. Our valuation base year is also kept unchanged at FY19E (refer to the overleaf for details of our Sum-of-Parts computation). Our TP implies FY19E PER of 19.6x (historical mean), while the stock is currently trading at 22.2x (+2.0 SD). As the group is likely to see softer fundamentals in the near term and valuation is expensive, we recommend investors to take profit. Moreover, the heavy investments into its businesses are also only expected to generate returns in the long run, given its four-year time frame. Note that our TP has not reflected the potential listing of Wilmar’s China business due to a lack of details and unknown timeline. We will re- look at our valuation basis with an upward bias pending more details.

Source: Kenanga Research - 08 Mar 2019