PPB's 9MFY24 results disappointed both Kenanga and consensus expectations. Grains & Agribusiness (G&A), cinema operations and Wilmar International Limited (WIL) saw lower earnings QoQ and YoY in 3Q and weaker YoY on 9M basis. However, a 4Q recovery is likely on seasonal uptick and firmer commodity prices.

Nevertheless, a profit cut is inevitable; hence, FY24-25F core net profits (CNP) are lowered by 10-5%, respectively. TP is also cut by 6% to RM16.50 but current share price levels suggest a lot of negativities have been priced in, hence our OUTPERFORM call is left unchanged.

9MFY24. Stripping out net fair value gains (RM35m), net exchange loss (RM15m) and net disposal gains (RM13m), PPB's 9MFY24 CNP inched up by only 3% to RM821.4m, to account for 62% and 65% of Kenanga and consensus respective full-year forecasts. All operating units saw weaker YoY earnings with only non-recurring or lumpy adjustments helping to lift FY24 CNP slightly ahead (3%) of last year's core PATMI.

3QFY24 CNP fell to RM237m (-19% QoQ, -25% YoY) due mainly to operational disruptions at WIL from an industry-wide cooking oil contamination scandal in China as well as sugar mill workforce dispute in Australia. However, QoQ and YoY contributions from G&A also disappointed as Typhoon Yagi disrupted its Vietnam operations including RM28m damages to inventory while Golden Screen Cinema (GSC) reverted into losses on fewer block buster releases, weak box office performance and ongoing relocation cost. Only Consumer Products and Property saw better QoQ earnings but even so both saw weaker YoY earnings.

Longer term earnings recovery still looks likely despite day-to-day speed bumps:

1. WIL. Upstream earnings should increase on firm palm oil and also sugar prices over the coming quarters. Meanwhile longer term demand for Food Product should continue inching up on the growing middle class in China, India and SE Asia. Likewise, profits for Feed & Industrial Products should pick up on improving demand.
2. PPB's G&A earnings are expected to grow in the longer term on favourable demographic and income levels nudging demand forward. Prices of raw input commodity such as wheat and corn are also expected to stay soft and a firmer MYR should further improve nearer term margins.
3. GSC's revenue to improve in FY25 on improving consumer spending and more blockbuster releases. Although cinema relocations and closures are still ongoing including recent closure at GSC Citta Mall, the pace should moderate moving forward.
4. Lumina Bedong township to start contributing. Soft launch of the 228-acre, RM900m GDV township located just to the north of Sg Petani in Kedah is ongoing, hence, contribution should begin in FY25 and to last around ten years.

Forecasts. We cut our FY24F and FY25F net profit by 10% and 5%, respectively, to reflect weaker YTD earnings from across the various units.

Valuations. Trim TP by 6% from RM17.50 to RM16.50 based on 16x FY25F PER, which is the average for larger market capitalization integrated plantation PER less a 15% holding company discount. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3). At our TP of RM16.50, PPB also trades at undemanding 0.7x FY24F PBV

Investment case. PPB enjoys strong business position in consumer essentials such as flour, feed, ready-to-eat products as well as mass entertainment in ASEAN while WIL provides exposure to Chinese and Indian consumer markets. Maintain OUTPERFORM.

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 - 29 Nov 2024