PPB Group Bhd
(April 18, RM18.80)
Initiate coverage with hold and a discounted cash flow (DCF)-based target price (TP) of RM19.50. PPB is a well-established and diversified group. In our view, the typical strong attributes of a consumer staple stock, stable but decent earnings per share growth, are found in PPB, which should continue to benefit from favourable demographics. PPB is a well-run company, with a good profit track record and direct exposure to one of the leading global agricultural businesses through its 18.5% stake in Wilmar International Ltd.

With its established position in the agricultural and consumer segments, we expect PPB to benefit from rising disposable incomes in Malaysia. This will potentially lead to growth in food consumption and leisure spending, resulting in higher cinema admissions, among others. This should help to boost revenue contribution for PPB’s core businesses (92% of revenue).

PPB owns an 18.5% stake in Wilmar International (share price S$3.69, “buy”), a leading global agribusiness listed on the Singapore Exchange. Wilmar is the world’s largest processor and merchandiser of palm and lauric oils, a leading soybean crusher in China, one of the largest flour millers globally, the largest producer of consumer pack edible oils and a leading consumer pack sugar manufacturer in Australia. PPB’s bottom line is highly dependent on Wilmar, which represents about 65-75% of PPB’s pre-tax profit.

We expect PPB’s earnings for financial years 2019 through 2021 (FY19-21E) core net profit to increase by 2% to 8% year-on-year to RM1.16 billion to RM1.3 billion, on the back of improving earnings from the core divisions of grains and agribusiness; film exhibition and distribution; environmental engineering and utilities as well as from its associate Wilmar.

We believe PPB’s strong financial position and prudent debt management will help the group to continue to expand and grow its core businesses locally and regionally. Our TP implies a 24 times earnings for FY19E price earnings ratio (PER), with a 4% upside potential.

Upside or downside risks would be higher or lower consumption of food products, substantial movements in raw material and labour costs as well as a sustained rebound or plunge in edible oil prices. — Affin Hwang Capital, April 18