PPB’s 1QFY24 results disappointed. Its 1QFY24 core net profit eased 11% YoY largely due to weaker performance from Wilmar International (WIL), partially cushioned by improved profits from PPB’s own flour and feed businesses. We cut our FY24F net profit forecast by 4%, reduce our TP by 5% to RM17.50 (from RM18.50) but maintain our OUTPERFORM call.

Its 1QFY24 core net profit of RM292m (excluding fair value gains of RM31m, disposal gains of RM12m and forex gain of RM2m) disappointed at only 18% of both our full-year forecast and the full-year consensus estimate. The variance against our forecast came largely from weaker-than-expected performance from WIL.

YoY, its 1QFY24 core net profit dipped 11% largely on weaker WIL contribution. PPB’s own grains and agribusiness (flour and feed milling) did better despite disposing its Indonesia operation in Aug 2023. Its revenue from consumer products improved but margin recovery was still slow. Its property earnings were also weak as its new project will only be launched later in FY24. Golden Screen Cinema (GSC) sales softened on poor block buster line-up and disruptions from ongoing relocations.

QoQ, its 1QFY24 revenue and PPB own earnings generally improved except for property division. However, profitability was dragged down mainly by seasonally weaker WIL earnings. PPB’s own operations did better including smaller losses from GSC. The property and consumer units did poorer but should improve over the coming quarters.

Outlook. We believe the uptrend in its profits is intact underpinned by:

1. While CPO prices are expected to stay flattish, cost pressures are easing, supportive of better quarterly earnings from WIL for the rest of FY24. Sugar price rally has moderated in 1QFY24 but prices remain 30%-40% above past 5-year and 10-year averages.

2. PPB’s regional grains & agribusiness earnings are expected to be flat following the Aug 2023 sale of its Indonesian unit. Demand and contribution from the other regional units should improve on soft wheat and corn prices in the nearer term underpinned by rising population and affluence in the longer term.

3. GSC’s revenue has yet to surpass pre-pandemic levels, hindered by poorer blockbusting titles as well as disruptions (and cost) from ongoing relocations. However, over the longer term, the market is still not matured, coupled with better titles and eventual normalisation of consumer spending, GSC is expected to revert to profit soon.

4. Contribution from the property unit should strengthen once PPB’s new Kedah property project, Lumina at Bedong with RM900m GDV is launched later this year.

Forecasts. We cut our FY24-25F net profit forecasts by 4% and 3%, respectively, to reflect weak WIL’s earnings.

Valuations. Correspondingly, we cut our TP by 5% to RM17.50 (from RM18.50) based on 16x FY25F PER (rolled forward from FY24F), which is the average for larger capitalised integrated plantation PER less a 15% holding company discount. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3). At our TP of RM17.50, PPB trades at 0.9x FY24F PBV.

Investment case. PPB enjoys 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 Chinese and Indian consumer markets. Maintain OUTPERFORM.

Risks to our recommendation include: (i) weather impact on commodity supply and prices, (ii) regulatory changes affecting prices of essential goods, and (iii) production cost inflation.

Source: Kenanga Research - 31 May 2024