PPB is proposing to sell its controlling interest in its Indonesian flour mill to 19%-associate Wilmar International (WIL) for 14x PER. WIL also reported its 1HFY23 results which came within 1% of our full-year forecast for FY23F. Maintain FY23-24F CEPS on stronger 2HFY23 for WIL as well as continual uptrend from PPB’s own businesses. Maintain OUTPERFORM and TP of RM19.30.

PPB and WIL have a long history in co-owning FFM Berhad (FFM). FFM’s main business is in flour milling, animal feed and grains trading. It started milling wheat flour in 1966 and, today, it is the largest flour miller in Malaysia with milling interests in Vietnam, Thailand, China as well as Indonesia. In 2004, the then listed FFM was taken private by PPB. PPB then sold 20% of FFM to WIL in 2010. Today, 80% of FFM is still under PPB with WIL continuing to hold the remaining 20%. Note that WIL in turn is an 18.8% associate of PPB.

FFM’s proposed selling its equity holding in PT Pundi Kencana (PK) to WIL. PK flour mill in Cilegon started operations in the west of Jakarta in 2009. The operations are largely owned by two groups, FFM (51%) and the Samora Group (25%), an Indonesian integrated sugar player with upstream sugar cane plantation operation, refining as well as the distribution of sugar. PK ended the financial year 31 Dec 2022 with net assets of RM162m and net profit of RM12m. An independent Indonesian valuer attached an indicative value of RM135m for PK. The present proposal is for FFM to sell its 51% stake in PK to WIL for RM87.5m thus valuing 100% of PK at RM172m or around 14x historic PER and 1.1x FY22 PBV. As such, the divestment value is not large with neutral impact on PPB. A small disposal gain of RM25m will also be recognised by PPB but moving forward, its effective economic interest in PK will fall from 42.7% to 9.6%. Essentially, the disposal will allow WIL to better operate and consolidate its other wheat and rice flour milling businesses in Indonesia with PK under its control.

WIL’s 1HFY23 results came in line with Kenanga’s expectation. WIL reported 1HFY23 CNP of US$577m on Friday (10 Aug) or 45% of our full-year CNP forecast of US$1,294m. We consider this within 1% of our full-year’s expectation as we expect a slightly stronger 2HFY23F coming from better margins in the food and plantation segments. This is also in line with the group’s guidance of a better second half of 2023 barring unforeseen circumstances.

Maintain CEPS, TP and OUTPERFORM. Our current TP of RM19.30 is 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) its strong market position in consumer essentials such as flour, feed, ready-to-eat meals as well as mass consumer entertainment in SE Asia, (ii) an integrated exposure into oil palm and sugar, from upstream production to selling branded consumer cooking oils and sugar products in China, SE Asia and India via WIL (iii) strong balance sheet and (iv) earnings should start recovering in FY24F.

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 - 14 Aug 2023