Maintain OUTPERFORM but TP nudged up from RM18.60 to RM19.30. Non-plantation operations such as flour and feed milling, agribusiness, cinemas and properties are still facing some supply and margin headwinds, though easing. Demand is encouraging and margins are likely to recover moving ahead, mitigating softer plantation-driven earnings from Wilmar International (WIL).

Record FY22 profit, likely. 9MFY22 PBT and PATMI of RM1,805m and RM1,781m, respectively, already exceeded previous FY07 record of RM1,732m PBT and PATMI of RM1,616m, underpinned by WIL. Earnings from PPB’s own operations only rebounded in 2QFY22 with the recovery momentum gaining pace in 3QFY22. Although 4QFY22 contribution from WIL should ease on softening CPO prices; all in all, a strong finishing to FY22 can be expected.

Non-plantation profits still facing headwinds but recovering.

(a) Demand for flour and feed meal is healthy but raising selling prices to offset higher input costs will require time so margins are expected to stay subdued into FY23 though recovering. Wheat prices have softened by over 25% since May 2022 peak price. Likewise, USD/MYR has also eased allowing for some margin leeway. Lastly, upward selling price adjustment can also be expected in FY23 and beyond.

(b) Consumer products margins have inched up since 2QFY22. Ready to-eat products are subjected to less rigorous price monitoring and the unit also distributes non-essential items like toiletries, cleaning products and some supplements. We expect margins to continue recovering over the coming 12-24 months.

(c) After incurring over RM100m in annual losses for the past two years, Golden Screen Cinemas (GSC) started recovering after operating hours were normalised in April 2022. GSC also took over 18 cinemas from MBO in Sept 2021 when the latter sought voluntary liquidation. With 30- 35% market share in screen or seating capacity and stronger presence in affluent areas, GSC is looking to capture about half the box office takings. In any case, FY22 should revert to over RM500m in revenue with profits to boot. Earnings are expected to improve further as GSC fine tunes its cinema locations and offers the premium Aurum Theatre.

(d) Softer CPO prices will temper WIL’s forward contributions even if WIL looks set to end FY22 with record earnings. FY23-24F earnings should ease as palm oil prices consolidate lower at RM3,500-4,000 per MT in FY23 compared to around RM4,500 in FY22.

Nudge up forecast core EPS by 4% each for both FY22 and FY23 to 136.0 sen and 122.8 sen, respectively, largely on margin recovery.

Maintain OUTPERFORM but raise TP to RM19.30 (from RM18.60) based on FY23F CEPS at 15x PER plus a 5% premium for its 4-star ESG rating as appraised by us. Key investment merits for PPB include: (i) strong market position in defensive food and ready-to-eat food essentials with robust demand, (ii) higher YoY margins likely moving forward after it suffered some compression in FY22, (iii) PPB’s cinema and mall earnings are normalising well on footfall recovery post pandemic reopening, and (iv) slower earnings from WIL is already largely reflected in the ratings given undemanding Price/NTA of 1.0x.

Risks to our call include: (i) weather impact on edible oil supply, (ii) unfavourable commodity prices fluctuations, and (iii) production cost inflation.

Source: Kenanga Research - 31 Jan 2023