The demand for flour, feed and basic food products should remain robust while the sales of its premium food products will remain soft. However, it is carefully repositioning its cinema business with premium and niche products. We cut our FY24-25F net profit forecasts by 3% and 4%, respectively, reduce our TP by 3% to RM18.50 (from RM19.10) but maintain our OUTPERFORM call.

We came away from PPB’s post-FY23 results briefing feeling reassured of its near-term outlook. The key takeaways are as follows:

1. Its grains & agribusiness operations should enjoy improving demand for flour and feed over FY24-25 on the back of supportive job market in Malaysia, recovering tourist arrivals in Thailand and buoyant Vietnam economy. Plant utilisation is around 70% (or higher) across the region: hence, PPB plans to allocate half the group’s 5-year capex of RM837m towards the flour and feed milling unit. A 4-acre site costing RM10m has already been acquired at Pasir Gudang for expansion. Additional investments into the group’s flour and feed milling operations in China look increasingly likely thereafter.

2. It believes the sales of its premium food products are likely to remain soft but the demand for essential and basic food products should stay robust. Consequently, selling prices and hence margins are expected to improve only gradually. New product launches will veer towards essential food products as consumers focus on “necessities” rather than premium good over FY24-25F. Margins are now expected to be tighter than previously expected given slower price rises.

3. PPB is repositioning Golden Screen Cinema (GSC) with new offerings – premium experience at Aurum Gardens and TRX and niche screening at Velvet in Mont Kiara – together with its existing format in new pockets in Selangor, Penang and potentially Johor. Efforts to increase local titles are ongoing, hence FY24-25 should see profits again but margin recovery may be gradual. Meanwhile, the impact from the Writers Guild of America strike in 2023 will continue to be felt through FY24 and into FY25. Recall, the division plunged into RM120m loss in FY23 after impairment charges totalling RM123m at both the Malaysian and Vietnam associate operations, with one of the reasons being the strike that led to launch delays of blockbusters such as “Dune: Part Two”.

4. It does not expect much improvement for its property business in FY24 as the launch of new property at Bedong, Kedah are likely only towards late FY24 or FY25.

5. It explained that the 7% drop in its FY23 topline was due to the removal of the topline contribution from PT Pundi Kencana (PTPK) following the sale of a 51% stake in PTPK by its 80%-owned FFB Berhad (FFM) to Wilmar International Limited (WIL) to allow better streamlining of PTPK into WIL’s existing flour and feed operations in Indonesia. WIL owns the other 20% of FFM and WIL is also a 19% associate of PPB.

Forecasts. We cut our FY24-25F core net profits by 3% and by 4%, respectively, to reflect more gradual margin improvement.

Valuations. Correspondingly, we reduce our TP by 3% to RM18.50 (from RM19.10) based on 16x FY24F PER, in line with the average of larger and well capitalised integrated planters. No adjustment is made for its 3-star ESG rating as appraised by us (see Page 3). At TP of RM18.50, PPB is trading at just under 1.0x FY24F PBV.

Investment case. We continue to like PPB’s strong business position in consumer essentials such as flour, feed, ready-to-eat products as well as mass entertainment in ASEAN while WIL provides exposure to China and India’s consumer markets. Maintain OUTPERFORM.

Risks to our call include: (i) weather impact on edible oil supply, (ii) unfavourable commodity prices fluctuations, and (iii) production cost inflation.

Source: Kenanga Research - 6 Mar 2024