PPB’s weak 1QFY22 PATMI of RM303m (-40% QoQ, -25% YoY) was mainly dragged by RM118m of fair value derivative losses. Adjusting for similar lumpy or one-off items, 1QFY22 Core Net Profit (CNP) of RM349m (-38% QoQ, -1% YoY) is still 14% below our expectation and 9% under consensus. The milling and cinema operations continued to report losses while the consumer, engineering and property segments were steady or slowly recovering. Associate, Wilmar International (WIL), reported good 1QFY22 earnings on firm palm and sugar prices as well as exceptional gain from the listing of Adani Wilmar. Looking ahead, rising costs over the next year or so will be a challenge to PPB especially for the lower margin milling business amidst a softer palm oil price prospect for WIL. We are revising down our Core EPS for FY22 and FY23 by 14% and 10%. We are also downgrading the TP from RM18.90 to RM15.00 and toning down MARKET PERFORM to UNDERPERFORM.

Within expectation. Grains & Agribusiness (flour & animal feed milling) segment which enjoyed RM124m profit a year ago saw losses widened from RM14m in 4QFY21 to RM138m in 1QFY22 due to operating losses arising from high commodity (i.e. raw material) costs as well as RM118m of fair value derivative losses. Consumer Products (FMCG and distribution) segment’s 1QFY22 profit of RM7m exceeded expectation considering the increase in labour and fuel costs. Meanwhile property earnings were relatively steady QoQ but cinema losses widened QoQ to RM30m as it prepares to reopen for business. 1QFY22 WIL contribution declined 17% QoQ to RM394m but was still higher by 14% YoY on: (a) better CPO and sugar prices, and (b) exceptional gain of US$176m following the listing of its Adani Wilmar JV in Jan 2022.

Outlook: The Russia-Ukraine conflict has pushed up international prices of food commodities such as wheat and corn but also oil seeds. Although there has been some recent easing, prices remained elevated YoY. Similarly, vegetable oil prices are expected to ease as palm oil and soya oil supply should improve seasonally in 2HCY22. However, prices are likely to stay relatively high due to supportive fundamentals such as: (a) tight international edible oils and fats market is likely to recover significantly only in CY23 (or beyond), (b) inventories of key importers are not high, including China which has yet to fully restart its economy from Covid-19, and (c) current high energy prices meant good latent demand for biofuels.

On expectations of firm palm oil and sugar prices, WIL’s upstream operations should continue to enjoy good earnings but margins are set to tighten moving ahead. While we expect palm oil prices to stay elevated, nonetheless prices have probably peaked or peaking. The Group’s milling business is also likely to stay challenging, at least for FY22 due to high raw material, energy and labour costs. The FMCG, cinema and property operations should see stable to improving performances over FY22-23 as economic and social activities in Malaysia normalize over time. However, improvements from these segments are not expected to offset the weakness in the milling operations.

We are revising down our FY22E EPS by 14% to 97.2 sen and downgrading our TP from RM18.90 to RM15.00 (based on Sum-of- Part). We are also toning down our recommendation from a MARKET PERFORM to UNDERPERFORM, partly due to: (a) weak 1QFY22 earnings, (b) a challenging next 6-12 months, and (c) while valuations may not be demanding compared to the Group’s historical trading range, ratings are not compelling either.

Source: Kenanga Research - 1 Jun 2022