BUY
cheeyoon@kimengkl.com
Price RM8.80
Target RM10.50
Reaping a bumper first half, buoyed by Wilmar & flour milling
Results surpassed expectations, with reported 1H08 EPS of 60.4 sen (versus our FY08 forecast of 77.6 sen). PPB reported a lower pretax profit of RM358m in Q208 (Q108: RM417m). Despite the weaker Q2, PPB still posted pretax profit of RM775m (+280%) and EPS of 60.4 sen (+350%) in 1H. This was largely due to higher profits from flour milling (+113%) and a RM473m profit contribution from Wilmar (excluding its share of RM75m of unrealised net losses from financial instruments) versus RM22m in H107. Balance sheet is healthy, although net cash balance is now lower at RM116m after the utilisation of excess cash for the special and final dividends. PBB declared an interim single tier dividend of 5 sen in 1H08, payable on 29 Sep 2008. It already paid a special dividend of 62 sen less tax on 12 May 2008. Following the payment of the special dividend and the FY2007 final dividend, PPB would have fully utilised all its section 108 tax credits. Therefore, all future dividends will be payable net under the single tier tax system.
Upping forecasts despite deteriorating conditions
EBIT margins for sugar refining and flour milling will be under pressure in 2H due to the high raw material and ocean freight costs. However, results in 2008 will still better than 2007 thanks to a full-year contribution from Wilmar. Post the analyst briefing, we are raising our EPS forecasts by 27-30%. As for normal dividend payment in FY08, we suspect PPB will maintain the net dividend payment at a level similar to that in FY2007. Despite the challenging market environment, PPB will spend RM200m-300m per year to expand its sugar refining, flour milling and film exhibition businesses in the next 2 years.
Cutting fair value but sugar & flour businesses remain free
Our sum-of-the-parts valuation has dropped to RM12.58/share following the sharp correction of Wilmar shares in recent weeks. However, the market values of PPB’s listed securities are still around RM10.9b (or around RM9.22 per PPB share), implying that investors are still getting the sugar, flour and other operations for free.
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