This article first appeared in The Edge Malaysia Weekly on March 15, 2021 - March 21, 2021

INVESTORS with a keen eye would have noticed a divergence between the share price trends of diversified conglomerate PPB Group Bhd and its Singapore-listed associate Wilmar International Ltd. PPB has an 18.5% stake in Wilmar.

PPB’s share price has remained largely unchanged in the last six months, closing at RM18.72 last Friday from RM18.60 on Sept 4, 2020. Wilmar, on the other hand, has seen its share price rise 21% over the same period to S$5.30 at last Friday’s close from S$4.37.

Traditionally, there had been a high correlation between the share prices of these two companies — at 0.7 times over the last five years, according to UOB Kay Hian Research. This correlation increased to 0.91 times in 2020, following the listing of Wilmar’s subsidiary Yihai Kerry Arawana Holdings Co Ltd on the Shenzhen ChiNext Board last October, it adds in its January report.

Notably, Wilmar’s share of profits contributes significantly to PPB’s bottom line. In the financial year ended Dec 31, 2020 (FY2020), the agribusiness company contributed some RM1.24 billion or 87% to PPB’s pre-tax profit.

Could this recent divergence in share prices present a buying opportunity for investors?

“If the film exhibition and distribution division recovers, the Movement Control Order (MCO) is lifted and PPB does not experience margin pressure from higher commodity prices, the divergence could ‘normalise’,” says an analyst.

Some market observers believe that the divergence could be due to the weaker financial performance of PPB’s other businesses in FY2020.

Specifically, PPB’s film exhibition and distribution and property businesses have been impacted by the MCO, while its consumer products division has been hit by rising raw material costs.

Others think that investors may be concerned about the group’s film exhibition and distribution division — Golden Screen Cinemas (GSC) — weighing on PPB’s financials. Cinemas in Malaysia were forced to shut down when the MCO was imposed in March last year. And even after they were allowed to reopen later in the year, they operated at just half of their capacities. Cinemas had to close again during the recent MCO 2.0.

The consensus on Bloomberg puts PPB’s target price at RM20.34, which means there is still an upside potential of 8.6% based on its current share price of RM18.72.

For perspective, the film exhibition and distribution division contributed 12% or RM556.1 million to the group’s revenue, and 5% or RM66.8 million to its segment profit, in FY2019. However, owing to the closure of cinemas during the MCO, the division ended FY2020 with a loss of RM135.59 million as revenue slipped to RM114.26 million.

Despite this setback, the group believes it is only temporary and expects the division to break even this year. But a meaningful recovery will likely happen only in 2022, PPB’s head of corporate affairs and CEO of GSC Group Koh Mei Lee said at a virtual analyst and media briefing last week.

In a move that surprised many last week, GSC announced that it would be acquiring the majority of cinema assets from the operators of the MBO chain of cinemas, which is undergoing a creditors’ voluntary winding up.

“The cinema industry faced the most challenging year during the Covid-19 pandemic because of the mandated closures. However, we believe that the worst is over and we can see light at the end of the tunnel. The vaccination programme is being rolled out globally and the pandemic would be just a temporary setback for the industry,” said Koh.

“The industry is still healthy … When the Covid-19 cases are low and when the pandemic is over, there will be pent-up demand for cinemas. At this time, we believe we are on the cusp of recovery. It is a timely acquisition. This year is a transition year and by 2022, we will have a meaningful recovery as things get back to normal.”

Koh also stressed the importance of content — which has been amplified by the pandemic — and that GSC has been co-investing in local content over the last few years. “The film exhibition industry in countries like China, Japan and even South Korea didn’t suffer as much because they have had the support of local content,” she pointed out.

“Content is important. When we reopen, we will have five titles on the plate ready for release. Our target is to have 5 to 10 movies a year, a mix of bigger titles and some mid-range movies.”

The government has given cinemas the green light to reopen from March 5 (Friday). However, they will only be allowed to fill up to 50% of the theatre’s capacity, in compliance with social distancing measures.

“Being able to open and having some revenue is better than no revenue at all,” says an analyst with a local research house.

While there has been a lot of buzz about PPB’s film exhibition and distribution

division, it is the grains and agribusiness division — involved in flour milling, animal feed milling and livestock farming — that contributes the most among its core businesses to the group’s revenue and segment profit. Its grains and agribusiness division comes under the FFM Group, in which it has 80% equity interest.

The grains and agribusiness division contributed RM3.2 billion or 76% to the group’s revenue, and RM271.7 million or 19% to its profit, in FY2020. The division is currently facing headwinds as commodity prices and freight costs have soared in the last few months.

“We’ve all seen extremely big spikes in raw materials. I believe high prices are here to stay for a while as it is both weather and supply related,” says FFM Group director and general manager Jeremy Goon.

“There have been increases in freight rates and packaging prices as well, some of which have been quite significant. So far, we have held back from raising prices, but that does not preclude us from increasing prices later on in the year. There will be a slight increase going forward, but [we will ensure it is imposed] only as a last resort.”

Other divisions of PPB include the consumer product unit, which produces and distributes baked products under the Massimo brand; the environmental engineering and utilities unit, which comes under its 55%-owned Chemquest Sdn Bhd; and the property development unit, which also operates four retail and commercial properties.

For FY2020, PPB recorded a net profit of RM1.36 billion, up 14% from a year ago, despite revenue declining 10% to RM4.19 billion. Gross dividend per share amounted to 46 sen or a 2.5% yield.

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