PPB’s 1QFY23 results disappointed. Wilmar’s (WIL) reported softer YoY earnings in 1QFY23 due to Adani Wilmar’s IPO listing gain in Feb 2022. Non-WIL PBT recovered well but not as much as expected but the earnings uptrend, underpinned by post-Covid normalisation, should persist. Maintain OUTPERFORM and TP of RM19.30 (based on FY24F 1.0x NTA) despite downgrading FY23- 24F CNP by 36% and 15%, respectively, on slower-than-expected 1QFY23 recovery.

1QFY23 results disappointed, coming in at only 19% and 16% of our full-year forecast and the full-year consensus estimate, respectively. The variance to our forecast came from slower-than-expected recovery of its grain milling, consumer products, Golden Screen Cinema (GSC), as well as property operations.

1QFY23 WIL’s CNP earnings actually rose 17% YoY once Adani Wilmar’s USD176m IPO gain was excluded from last year’s first quarter’s earnings. PPB’s own non-WIL earnings in 1QFY23 also turned around, from losses of RM154m a year ago to RM95m PBT (+60% QoQ) thanks to grain milling recovering from RM138m loss last first quarter to RM59m PBT in 1QFY23 as wheat prices eased. GSC started improving after April 2022 when Covid movement rules eased. Although stronger 1QFY23 earnings were expected, it posted a small RM25K loss. Likewise, a stronger property PBT was also expected but at least it managed a small profit of RM0.7m. Recovery in consumer products was also slower. Our stated CNP is lower compared to NP because we adjusted out RM49m of fair value as well as disposal gains (from disposal of adhesive unit to Techbond) and offset by RM9m of foreign exchange loss. PPB ended 1QFY23 with RM184m net debt (1% net gearing) versus end-FY22’s net debt of RM141m.

Recovery momentum on track. Although WIL’s earnings are expected to stay subdued, PPB’s overall earnings should bottom out in FY23 with continual recovery into FY24 on the back of the following:

1. WIL’s 1QFY23 NP slipped 26% YoY but excluding USD176m of Adani Wilmar IPO gains in the previous first quarter, WIL’s 1QFY23 CNP actually rose 11% YoY. Nevertheless, softer CPO is expected on recovering edible oil supply and we are toning down FY23-24F average CPO prices from RM3,800 to RM3,700 per MT. However, demand is also recovering, hence our modest downgrade in price.

2. Grains & agribusiness earnings from flour and feed milling are set to improve further on growing demand and gradual price increments but also on falling input prices of grains, such as wheat and maize, which are at 2021 levels again.

3. PPB commands over half the Malaysian cinema box office collections as cinema patrons surged back after Covid restrictions were relaxed. GSC’s recovery in 1QFY23 was slower than expected but strong earnings uptrend is still expected going into FY24.

4. Likewise, the mall business should welcome more tenants and enjoy better footfall moving forward while its new Kedah property project should start contributing more meaningfully from FY24 onwards.

Maintain OUTPERFORM despite downgrading FY23-24F CNP. We like PPB’s strong business positions in consumer essentials such as flour, feed, ready-to-eat products as well as mass entertainment in ASEAN. Balance sheet is also strong and P/NTA is not demanding.

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 Jun 2023