This article first appeared in The Edge Financial Daily on June 4, 2018
PPB Group Bhd
(June 1, RM19.82)
Maintain hold with a lower target price of RM16.90 from RM17.45 previously: PPB Group Bhd reported a core net profit (CNP) of RM190 million (-49.6% quarter-on-quarter [q-o-q], -42.6% year-on-year [y-o-y]) in the first quarter of financial year 2018, ended March 31 (1QFY18).
CNP was below expectations due to weaker-than-expected performances at its core businesses. Operating margins were also weaker despite revenue coming in within our expectations. Associate firm, Wilmar International Ltd, did not do as well too. Weaker q-o-q net profit due to weaker contribution from Wilmar. Earnings before interest and tax (Ebit) dropped 49.6% q-o-q in 4QFY17, mainly due to weaker contribution from Wilmar (-54.1% q-o-q).
Meanwhile, all core segments reported improved q-o-q Ebit, except for environmental engineering and utilities, whose Ebit declined 45.9% q-o-q.
All core businesses reported weaker y-o-y Ebit except for environmental engineering and utilities.
Film exhibition and distribution and grains and agribusiness registered the largest y-o-y declines in Ebit. Film exhibition and distribution was dragged down by losses incurred from film distribution as Chinese New Year titles did not perform to expectations. Grains and agribusiness were affected by higher raw material costs which led to lower margins. Associates’ contribution were also weaker y-o-y.
We forecast earnings from the grains and agribusiness, cinema operation and consumer products segments to grow 5% to 6% y-o-y for 2018. The grains and agribusiness segment will focus on export-oriented customers as well as the local consumer market for growth.
The consumer products segment is expected to benefit from the reduction in the goods and services tax (GST) to zero-rate from June 1, 2018, which should stimulate domestic consumption. Cinema operations will be supported by a stronger movie line-up in Malaysia and Vietnam.
Meanwhile, the property and environmental engineering and utilities segments will focus on timely completion of ongoing projects. Nevertheless, group earnings will continue to be highly dependent on Wilmar.
We cut our FY18, FY19, FY20 net profit estimates by 11.6%, 12.1% and 4.6% respectively to factor in our adjustment to Wilmar’s earnings on weaker sugar margins as well as lower margins for all core segments in 2018. We now expect net profits of RM1.05 billion, RM1.17 billion and RM1.33 billion for FY18, FY19 and FY20 respectively.
PPB’s share price has risen 16.6% year to date. Despite the strong share price rally, maintain “hold”. As PPB is a consumer-related stock, it is likely to benefit from the reduction in GST to zero-rate from June. Moreover, we are positive about Wilmar’s outlook and the potential listing of its China operations in 2019 is likely to bring in special dividends for PPB.
PPB is also a defensive play as historically, it “outperformed” the market in times of high volatility.
We maintain our “positive” view on Wilmar despite its 1QFY18 earnings missing our expectations. We expect earnings to pick up in the next two quarters. — UOB Kay Hian, June 1