PPB Group - Dragged by Wilmar Hold

- Maintain HOLD on PPB Group Bhd, with a lower fair value of RM17.25/share versus RM17.45/share previously. Our fair value of RM17.25/share is based on a PE of 18x on FY13F EPS.  

- In the past seven years, PPB’s PE band ranged from a low of 9x to a high of 24x. Average PE was 15x. PPB’s 18%-owned associate, Wilmar International, is currently trading at FY13F PE of 11x based on  Bloomberg consensus estimates.

- PPB’s 1QFY12 results were below expectations and consensus estimates due to Wilmar’s weak results. We have cut PPB’s FY12F-FY13F earnings forecasts by 6% to 9%. 

- PPB’s share of profits in associates (mainly Wilmar) fell 36.6% from RM223.3mil in 1QFY11 to RM141.6mil in 1QFY12. 

- Wilmar’s pre-tax loss of US$52.5mil in the soybean crushing and refining division was attributed to poor timing of purchases of feedstock and overcapacity in the soybean crushing industry in China.

- Disregarding Wilmar, PPB’s EBIT was flat at RM56mil in 1QFY12 against 1QFY11. The group’s revenue expanded 20.2% YoY to RM697mil in 1HFY12 underpinned by a 29.5% expansion in the turnover of the flour division. 

- In spite of the strong revenue growth, PPB’s EBIT was stagnant in 1HFY12 due to margin erosions in the flour, cinema and livestock divisions. 

- We believe that the flour division was affected by losses in the bread division. PPB’s Massimo wheat germ bread is still being sold at the promotional price of RM2.50/400 gm loaf after launching in July 2011. 

- We reckon that PPB’s strategy is to increase its market share in the bread industry in Malaysia first before increasing the selling price of the bread.   

- We believe that the flour division would have performed better if not for the losses in the bread segment. This is due to lower wheat prices. 

- According to Bloomberg, which uses low protein soft red wheat as a gauge, price of wheat fell by about 23% from an average of US$8.64 5/8/per bushel in 1QFY11 to US$6.64 1/4/bushel in 1QFY12.   

Source: AmeSecurities