PPB Group - Bread division doing well Hold

- We are keeping our HOLD recommendation on PPB Group, with an unchanged fair value of RM15.90/share. Our fair value is based on an FY13F PE of 18x. 

- PPB held an analyst briefing yesterday. In respect of the group’s 18.3% equity interest in Wilmar, we understand that PPB has no intention of increasing its stake for the time being. 

- PPB is confident of Wilmar’s medium- to long-term prospects and it would not be judging Wilmar based on two quarters of weak performances.  

- We gather that PPB’s bread division is profitable although management declined to disclose details. This is an impressive feat as a bakery usually takes about three years to be profitable. PPB’s bakery buys flour sourced from the group’s flour division at market prices. There is no transfer pricing.

 

- PPB’s bakery is currently operating at a full capacity of 10,000 loaves/hour and the group has plans to add another line, which would be up by 18 months’ time. There are no details on Massimo’s market share as management does not know the production numbers of its competitors.

- PPB has an approximately 2% market share in the poultry industry in Malaysia. Currently, the production cost of eggs and day old chicks are higher than the selling prices.

- For example, the cost of producing an egg (C grade) is 28 sen versus the selling price of 24-25 sen, while the cost of producing a day old chick is RM1.25-RM1.30 versus the selling price of RM0.65.

- PPB’s poultry division also did not perform well in 1HFY12, as two of its poultry farms were affected by disease. There was a production shortfall as the birds could not produce eggs. EBIT of the chemicals, livestock, investments and other operations swung from an EBIT of RM20.4mil in 1HFY11 to a negative RM8.4mil in 1HFY12.

- PPB would be opening seven cinemas in the coming two years. This would bring total screens to 285 from 215 currently. 

- The cinema division was affected by higher film distribution cost. We understand that it is getting more expensive to acquire films. Apart from its own cinemas, PPB also distributes films to outside cinemas. EBIT of PPB’s cinema division fell 8.5% YoY to RM19.6mil in 1HFY12.   

Source: AmeSecurities