PPB’s FY22 results beat our forecast on record Wilmar (WIL)’s earnings, but only met consensus estimate. Its direct operation generally improved YoY even though 4QFY22 performance was mix. Prospective earnings from WIL are likely to weaken over FY23-24 but recovery momentum from other operations should stay intact. We maintain our FY23F net profit, TP of RM19.30 and OUTPERFORM call.

FY22 earnings exceeded our expectation by 11% largely on record Wilmar (WIL)’s earnings but only met consensus estimate. FY22 PATMI is higher than core net profit by RM53m largely due to adjustments for: (i) RM15m in foreign exchange gains, (ii) fair value loss of RM110m, and (iii) RM122m in net IPO gains of Adani Wilmar less impairment for GSC’s Vietnam associate.

During 4QFY22, the group’s grain & agriculture business (milling flour & feed and poultry farming) fared better QoQ and YoY, thanks to contribution from a new 500MT/day mill in Vietnam. Consumer products PBT also continued to do better as volume and margins gained from the post-pandemic normalisation since 2QFY22. The recovery momentum at Golden Screen Cinemas (GSC) held but reported losses in 4QFY22 due to impairment at its Vietnam associate. However, property earnings stalled on lower property sale in 4QFY22. WIL’s 4QFY22 was weaker QoQ and YoY but remained healthy. PPB ended FY22 with a net debt of RM141m (vs end Sept 2022 RM415m 1.6% net gearing).

Outlook for main earnings contributor, 19% associate WIL, should ease on softening palm oil prices. Nevertheless, palm oil demand should pick up as: (i) palm oil is cheaper than other major vegetable oils, (ii) China, a major market, has started buying more following zero-Covid policy relaxation, and (iii) fossil fuel prices have softened a little recently but remain elevated enough to support biofuel demand. Maintain FY23F CPO price of RM3,800/MT and RM3,500/MT for FY24.

Grains & agribusiness earnings from flour and feed milling are likely to stay challenging but margins are improving on recent price softening of input while potential selling prices increment cannot be dismissed further out. The turnaround in GSC should continue, not just on post Covid normalisation in traffic but also additional 18 cinemas bought from MBO in 2021 and higher value bundling. Likewise, PPB’s mall business is set to enjoy better footfall and maiden contribution from Megah Rise mall which opened late last year. Altogether, PPB’s consumer products and services should enjoy stronger earnings ahead, mitigating otherwise softer contributions from associate WIL.

We maintain our FY23F net profit and TP of RM19.30 based on 15x PER against FY23F CEPS plus a 4-star ESG rating premium of 5%. Maintain OUTPERFORM for PPB’s strong market position in recovering consumer spending on essentials and offerings such as flour, feed, ready-to-eat products and entertainment which should extend into FY23, helping to mitigate softness from WIL’s edible oils, sugar and feed earnings. Prospective P/NTA of 0.9x is undemanding as well.

Risks to our recommendation include: (i) weather impact on commodity supply and prices, (ii) regulatory changes affecting prices of essential goods, and (iii) production cost inflation.

Source: Kenanga Research - 1 Mar 2023