PPB Group - Normalised dividends HOLD

Maintain HOLD on PPB Group Bhd, whose 4QFY11 results were within expectations and consensus estimates. We have slashed PPB’s FY12F earnings forecast due to a weak operating margin in the grains, trading and flour division, and reduced profit contribution from 18%-owned associate, Wilmar International. 

PPB’s pre-tax profit declined 6.6% YoY to RM1.06bil in FY11. Share of profits in Wilmar only improved by 5.5% YoY to RM814.6mil in FY11.

Recall that Wilmar was affected by low palm oil refining margin in Malaysia and soybean crushing margin in China in 4QFY11. The group’s oilseeds and crushing division recorded a pre-tax profit of only US$1.7mil in 4QFY11.

PPB’s share of Wilmar’s profits was also affected by a strong US$/RM exchange rate in FY11. The Ringgit strengthened by 5% from an average of US$1.00:RM3.2191 in FY10 to US$1.00:RM3.0585 in FY11. 

PPB has declared a final gross DPS of 13 sen single-tier, which brings total gross DPS to 23 sen single-tier in FY11 (FY10: 88 sen). The total gross DPS of 23 sen translates into a yield of 1.3% in FY11. Dividend payments were high in FY10 due to surplus cash received from the disposal of the sugar business. Only consumer products and environmental engineering divisions recorded profit growth in FY11. Although revenue of the flour division climbed 29.8% YoY to RM1.6bil in FY11, EBIT fell 12.9% to RM135mil. 

EBIT margin of the flour division weakened from 12% in FY10 to 8% in FY11 due to an increase in wheat costs. We also reckon that the bread business is not profitable yet. According to Bloomberg, wheat prices rose more than 12% from an average of US$7.02 1/4/bushel in FY10 to US$7.89 13/16/bushel in FY11.  

Going forward, PPB is expected to benefit from the fall in wheat prices. Wheat price is currently hovering at US$6.67/bushel.

Turnover of the cinema division expanded 12.2% YoY to RM283.3mil in FY11. However, EBIT of the division fell 14.9% from RM44mil in FY10 to RM37.4mil in FY11 due to the costs of opening new cinemas and an increase in staff costs. In FY12F, PPB would be opening five to six cinemas.

Source: AmeSecurities