PPB Group - Hurt by Wilmar again Hold

- Maintain HOLD on PPB Group Bhd, with a lower fair value of RM15.90/share versus RM17.25/share previously. Our fair value of RM15.90/share is based on a PE of 18x on FY13F EPS. 

- PPB’s 18%-owned associate, Wilmar International, is currently trading at FY13F PE of 11.4x (based on consensus estimates) compared with PPB’s 15.8x. 

- Not surprisingly, PPB’s 1HFY12 results fell short of our expectations and consensus estimates due to Wilmar’s weak results.  

- PPB’s share of profits in associate declined 52% from RM446.3mil in 1HFY11 to RM214.4mil in 1HFY12. Recall that Wilmar’s core net profit shrank 51.5% from US$779.8mil in 1HFY11 to US$378mil in 1HFY12 due to losses in the oilseeds and grains and sugar milling divisions. 

- A positive note is the depreciation of the RM against the US$. US$ appreciated 1.8% from an average of US$1.00/RM3.0324 in 1HFY11 to US$1.00/RM3.0878 in 1HFY12. Wilmar’s earnings are reported in US$. Hence, PPB benefits from a weaker RM when Wilmar’s earnings are translated into RM.

- PPB’s flour division recorded an 8.2% increase in EBIT from RM61mil in 1HFY11 to RM66mil in 1HFY12. We believe that this was due to the fall in wheat costs. We reckon that improved performance from the flour division helped in compensating for losses in the bread subdivision.

- EBIT margin of the flour division inched down marginally from 8% in 1HFY11 to 7% in 1HFY12. 

- According to Bloomberg, the price of low protein soft red wheat fell 23.6% from an average of US$8.77/bushel  in 1HFY11 to US$6.70 1/8/bushel in 1HFY12. 

- To improve market share, Massimo bread is still being sold at the promotional price of RM2.50/400 gm loaf after its launch in July last year.  

- Massimo had also launched a new bread product, i.e. whole wheat loaf in June 2012. The selling price of whole wheat bread is RM3.50 for a 420 gram loaf. 

- EBIT of the cinema division declined 8.5% YoY to RM19.6mil in 1HFY12 on the back of higher distribution costs.   

Source: AmeSecurities