PPB Group Bhd
(Sept 7, RM15.02)
Maintain market perform with a higher target price (TP) of RM16.92: We attended PPB Group’s first half ended June 30 analysts’ briefing, which was well attended by about 30 people. We came back feeling “neutral” on PPB’s short-term prospect, although its long-term outlook remains “positive”. 

Despite the neutral-to-positive impact due to a stronger US dollar, and continued film segment growth, slower grains and property contributions could limit its short-term prospect.

The management noted that the stronger US dollar (+21% since January 2015) has a negligible negative impact on its grains and agribusiness segment (G&A) as its fully-imported wheat has also seen a price decline (-34% since January 2015). 

We view that a strong US dollar is slightly “positive” overall to PPB as it can result in higher contribution from associate Wilmar International Ltd (72% of financial year 2015 [FY15] profit before tax [PBT]). Accordingly, we raised our FY15 to FY16 US$/RM assumption by 7% to 3.83, in line with our latest in-house forecast. Hence, we revise upwards our FY15 to FY16 estimate core net profit by 3% to RM0.98 to RM1.08 billion.

Recall in our previous update (March 6) that the film exhibition and distribution segment targeted six new locations in 2015 with a goal of 11 new cinemas by 2017, totalling 42 locations (from 31 as of end-2014). 

We believe both targets are fully achievable as four locations have begun operations in the first half of 2015 while two more locations (Alor Setar, Klang Valley) should be completed by the fourth quarter of 2015 (4Q15). 

We also gather that the company plans to extend its film business overseas with a joint venture to open a nine-screen cinema in Cambodia’s largest shopping mall. Hence, we remain “positive” on the film division’s prospects on its 35% growth in cinema locations by 2017. 

Despite softer wheat prices, the management noted that the Indonesian flour market is increasingly competitive due to a recent price war as a new competitor entered the market. This resulted in 2QFY15 PBT declining 70% year-on-year  and 79% quarter-on-quarter to RM16 million. Although PPB expects to outlast the small players with its better distribution network, we believe our recently lowered FY15 G&A margin of 5% (from 8%) is justified.

In line with other Johor-centric property players, PPB was affected by the subdued market sentiment in its Puteri Harbour project, which saw a take-up rate of about 55%. Nevertheless, we are “neutral” on the earnings impact of the project as we believe its contribution to PPB’s FY15 PBT is limited to RM17 million or 2%, assuming a 20% PBT margin.

We maintain “market perform” with a higher TP of RM16.92. Our TP of RM16.92 (previously RM16.50) is derived from an unchanged 19.5 times forward price-earnings ratio (PER) applied to a higher average FY15 to FY16 earnings per share of 86.8 sen (previously 84.6 sen). Our 19.5 forward PER valuation is based on the three-year historical mean valuation, justified by our “neutral” outlook on PPB and its associate Wilmar. — Kenanga Research, Sept 7

This article first appeared in digitaledge Daily, on September 8, 2015.