PPB Group - Flour affected by grains trading and forex loss HOLD

- Maintain HOLD on PPB Group Bhd, with a lower fair value of RM13.15/share (versus RM15.90/share previously). Our fair value of RM13.15/share is based on a PE of 16x on FY13F EPS. 

- In the past seven years, PPB Group’s PE ranged from a low of 8.7x to a high of 26.1x. Average PE was 16.1x. 

- PPB’s 18%-owned associate, Wilmar International, is currently trading at an FY13F fully diluted PE of 12.3x versus PPB’s 14.6x. 

- PPB’s results were above our forecasts due to Wilmar’s better-than-expected 3QFY12 net profit. Recall that Wilmar recorded a turnaround in its oilseeds and grains division due to improvements in soy crushing margins and timing of purchases of feedstock.

- Excluding Wilmar, PPB’s EBIT fell 31.2% YoY to RM129.8mil in 9MFY12. Earnings of the grains, trading, flour and feed milling division weakened in 3QFY12. 

- EBIT of the division fell 83.1% from RM22.4mil in 2QFY12 to RM3.8mil in 3QFY12 due to unfavourable grains trading and foreign exchange hedging. The division recorded a fair value loss on derivatives of RM30.8mil in 3QFY12. EBIT margin of the division eased from 5% in 2QFY12 to 1% in 3QFY12.

- Using low protein soft red wheat as a gauge, average price fell 12% from an average of US$8.61 1/8 per bushel  in 9MFY11 to US$7.56 5/8 per bushel in 9MFY12.  

- However on a QoQ basis, wheat costs increased in 3QFY12. Price of wheat rose 34.6% from an average of US$6.59 13/16 per bushel in 2QFY12 to US$8.87 ¼ per bushel in 3QFY12.

- Chemicals, livestock, investments and other operations division, which includes contributions from the Massimo bread, recorded losses in 9MFY12. The losses were mainly due to the livestock farming sub-segment.  

- From a previous analyst briefing, we understand that Massimo bread operations is already breaking-even after its launch in July 2011. This is in spite of the bread products still being sold at their promotional prices.

- Going forward, earnings of this division could improve due to the 2-sen increase in the selling price of chicken eggs, which took place at end-October 2012.   

Source: AmeSecurities