The Malaysian Competition Commission (MyCC) meted out a fine of RM416m on five chicken feed manufacturers. FFM Berhad, an 80% subsidiary of PPB, is among them but may still challenge MyCC over its RM43m fine. We are maintaining PPB’s FY23-24F core EPS but downgrading its TP from RM19.30 to RM18.40 on lower ESG rating of 3-star, down from 4-star. Its long-term business strategy and prospects remain intact, and valuation is not demanding with earnings expected to recover from FY24 onwards, Maintaining our OUTPERFORM call.

Background. Early last year, MyCC indicated to the public it was investigating a group of poultry industry players for infringing Section 4 of the Competition Act 2010. In Aug 2022, MyCC issued a Notice of Proposed Decision against five feed millers for entering into anticompetitive agreements or concerted practices to raise the prices of poultry feed that contain soya meal and maize as its main ingredient from early-2020 to mid-2022.

FFM was among the five feed millers notified in Aug 2022 including a financial penalty of RM47m imposed on FFM. On 22 Dec 2023, FFM received the Notice of Finding of An Infringement under Section 40 of the Competition Act 2010 along with a slightly reduced financial penalty of RM43m. FFM still views the decision as without merit and may consider challenging MyCC’s decision.

More reputational impact than financial. Assuming FFM charges the entire RM43m penalty to FY23 earnings, the impact on core net profit is less than 5% and this is despite the fact that FY23 is a relatively soft year for the group. Whilst the financial impact may not be material to PPB, the impact on the group’s reputation is still negative in the short term. However, we suspect the long-term reputational impact is likely to be minimal and FFM’s feed business is also unlikely to suffer much as the group has a long established and strong presence in the region’s milling supply chain and market.

Maintain FY23-24F core EPS and OUTPERFORM but downgrading our TP from RM19.30 to RM18.40. Our original TP of RM19.30 was based on FY24F CEPS at 16x PER plus a 5% premium for its 4-star ESG rating as appraised by us. In light of the negative short-term reputational impact of MyCC’s latest decision on PPB, we are toning down its 4-star ESG rating to 3-star and removing the 5% premium. Therefore, our revised TP of RM18.40 is based on just FY24F CEPS at 16x PER, which in in line with ratings of other larger integrated players.

However, the overall investment merits for PPB remains intact, namely: (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) integrated exposure into oil palm and sugar, from upstream production to selling, distributing and branding consumer cooking oils and sugar products in China, SE Asia and India via WIL, (iii) strong balance sheet, and (iv) an expected earnings recovery from FY24 onwards.

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 - 26 Dec 2023