PPB’s 1HFY24 results were within market, but below Kenanga’s, expectation. Good milling and feed margins were dampened by weak recovery in the consumer food products and cinema operations. However, a better 2H is still likely coming from PPB’s own operation as well as from associate, Wilmar International Limited (WIL) as consumer spending on food and entertainment is set to grow. Nonetheless to reflect YTD softness, FY24 core net profit is trimmed by 8% but FY25-driven TP of RM17.50 is maintained along with our OUTPERFORM call as long-term fundamentals are intact.

1HFY24. After excluding fair value gains (RM52m), disposal gains (RM13m) and exchange loss (RM3m), PPB’s 1HFY24 core net profit grew 22% to RM585m. This amounted to only 43% and 41% of consensus and Kenanga’s full-year forecasts, respectively. Consumer Products margins tightened on sticky cost and higher marketing spend while earnings for Golden Screen Cinema (GSC) were eroded by lumpy closure (4x) and relocation (3x) costs. On balance, Grain & Agribusiness earnings did well and WIL’s contribution also grew 13% YoY.

2QFY24 saw core net profit nearly doubling YoY to RM293m but flat QoQ. WIL’s contributions rose YoY but dipped QoQ. Grains & Agribusiness earnings were weakened QoQ due to the sale of its entire 20% stake in Yihai Kerry (Shenyang) Oils, Grains & Foodstuffs Industries Co. Ltd in March this year. This was offset on QoQ basis by GSC returning to profit of RM15.7m (vs RM14.5m loss in 1Q). Consumer Products and Property earnings saw mixed QoQ and YoY trends but remained small in any case.

Outlook. With two of PPB’s core businesses still performing below pre- pandemic levels namely property and GSC - group earnings have room to recover moving forward underpinned by the following:

1. WIL. Upstream CPO earnings should stay firm (save for sugar which has seen prices slipping by 10-20% YoY since 2Q). Growth from the food segment is expected to stay soft-to-flattish amid easing cost pressures. This supports higher quarterly earnings from WIL for the remainder of FY24. Sugar price rally has moderated since 1QFY24 but prices are still 30%-40% above the longer term 5-year and 10-year averages.
    
2. PPB’s grains & agribusiness earnings are expected to stay firm despite the absence of its Indonesian operation after being sold to WIL last August to consolidate the market there. Long-term demand is set to inch up on favourable demographic and income level. Easing inflation should further encourage consumer spending while prices of commodity inputs such as wheat and corn are also soft, helping to lift margins.
    
3. GSC’s revenue should pick up as relocations and closures of cinemas are set to abate in 2H along with the return of blockbuster titles such as “Deadpool & Wolverine” which was released in July with others to follow. Consumer spending should also normalise moving ahead.
    
4. Lumina at Bedong, the group’s new RM900m GDV property project at Kedah is pending launch in late FY24 or early FY25.

Forecasts. We cut our FY24-25F net profit forecasts by 8% and 4%, respectively, to reflect weaker YTD consumer and GSC earnings.

Valuations. Maintain TP at RM17.50 based on 16x FY25F PER, which is the average for larger market capitalization 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 also trades at undemanding 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 - 2 Sep 2024