What’s New

• 4Q/FY16 earnings beat expectations

• Rebound in Wilmar earnings and stronger USD to the ringgit lifted full year earnings

• Other businesses seeing thinner margins from more challenging operating environments

• Raised FY17/18F earnings 6%/4% on higher Wilmar forecasts, weaker ringgit; TP revised to RM17.50; maintain HOLD

Keeping steady

Supported by key associate. PPB posted a strong turnaround in 2H16 as associate earnings rebounded aided by a stronger USD, resulting in flattish FY16 earnings (-0.6% y-o-y) despite reporting maiden quarterly losses in 2Q16. However, core EBIT from its other businesses declined 5% y-o-y, given thinning margins across its consumer-centric businesses and slim orderbooks for its property and environmental engineering divisions. We raised our forecasts to impute higher Wilmar estimates and a weaker ringgit, but upside remains limited at current levels. Maintain HOLD.

Neutral outlook on Wilmar. Making up >70% of earnings and total asset value, PPB’s stake in Wilmar is the key driver of group performance. DBS Singapore has a HOLD rating on Wilmar (with S$3.90 TP), given lack of near-term catalysts. Its contribution to PPB is subject to currency movements, and we have employed DBS’ revised USDMYR forecast of 4.62/4.71 for FY17/18F.

Diversified consumer conglomerate. The outlook for PPB’s consumer business segments, encompassing flour and feed milling, cinema operations, and food production/distribution, remains broadly stable despite the challenging economic environment. This is due to its integrated and diversified businesses, plus expansion efforts like setting up new flour mills in Johor and Vietnam, and adding cinema screens which can help offset rising expenses.

Valuation

We value PPB using the sum-of-parts (SOP) methodology, incorporating DBS’ TP of S$3.90 for Wilmar International, and PE multiples for its other businesses. Our TP is revised to RM17.50, which also implies 0.95x FY17F P/BV.

Key Risks to Our View

Sharp fall in Wilmar’s share price. PPB’s share price movement is highly correlated to that of Wilmar and as such, a de-rating of Wilmar presents downside risk to PPB as a premium is already implied at its current price.

Source: Alliance Research - 1 Mar 2017