PPB likely to experience softer earnings in FY20

PPB Group Bhd
(Feb 28, RM18.10)
Maintain market perform with an unchanged target price (TP) of RM19.60:PPB Group Bhd’s financial year 2019 (FY19) core net profit (CNP) of RM1.05 billion came in within expectations at 95% and 100% of our and consensus estimates respectively. A declared dividend of 23 sen (full-year dividend: 31 sen) is deemed to be slightly below our forecast of 33 sen, translating into a payout ratio of 38.3%.

FY19 CNP rose 17% on the back of: i) stronger earnings from Wilmar International Ltd (+15%); ii) better contributions from grains and agribusiness (+17%), thanks to favourable flour prices which cushioned costlier raw materials; and iii) sustained performances from its film business (-0.5%) as its higher revenue (+2%) was offset by a steeper operating expenditure and lower virtual print fee income.

Its fourth quarter (4QFY19) CNP of RM347.9 million slipped 12%, dragged by: i) the lower contribution from Wilmar (-10%) coupled with ii) weaker film operations (-28%), similarly due to the foresaid higher depreciation costs.

For the individual quarter of 4QFY19, core earnings grew by 72%, similarly boosted by significantly better earnings from Wilmar (+98%) as well as grains and agribusiness (+44%), thanks to stronger contribution from the flour business.

This was, however, partially shadowed by weaker film operations (-9%), no thanks to the accelerated depreciation for GSC Pavilion assets due to its intended closure in early 2020.

Moving into FY20, we believe the group is likely to experience softer earnings. This is stemming from the anticipation of weaker 1QFY20 earnings from Wilmar, as i) soybean crush margins and volume are expected to be adversely affected by the Covid-19 outbreak, while ii) its sugar segment is likely to register losses with the end of the sugar crushing season (June to November in Australia).

Moreover, the group’s film business is also expecting some weakness in the upcoming quarter due to the virus outbreak. Nonetheless, this is expected to be partially mitigated by the group’s grains and agribusiness segment, as more favourable flour prices should help cushion any fluctuations in raw material prices.

Post-results, we made no changes to our forecasts. We maintain “market perform” on PPB with an unchanged TP of RM19.60 based on the joint sum-of-parts between PPB and Wilmar. We value its grains and consumer products segment at 27 times price-earnings ratio (PER), representing a 30% discount to QL Resources Bhd’s three-year PER of 38 times; its palm plantation segment at 31 times PER, reflecting the higher crude palm oil prices and its large-cap/FBM KLCI component status; film segment at 20 times PER, in line with consumer retail peers; sugar at 18 times PER, and other segments at book value. Our TP implies FY20E PER of 23 times (mean), while the stock is currently trading at 21.5 times (-0.5 standard deviation).

Risks to our call include: i) better/weaker-than-expected crush/refining margins; ii) better/worse commodity price trends; and iii) the weaker/better-than-expected sales volume and consumer demand. —Kenanga Research,Feb 28