12-Month Target Price: MYR10.00
Market Value - Total: MYR10,491.7 mln
Analyst: Siti Rudziah Salikin
Summary: PPB Group (PPB) is a diversified conglomerate. Its operations include sugar refining, flour and feed milling, cinema operations, environmental engineering and waste management, property, livestock farming, packaging and manufacturing. PPB also owns 18.3% of an integrated oil palm plantation group, Wilmar International.
Results Review & Earnings Outlook
PPB’s 1H08 net profit of MYR716.2 mln accounted for 64.1% of our full-year forecast. However, we view the performance to be within our expectations as we are looking at softer earnings for the group in 2H08 given the general weaknesses in commodity prices. YoY comparison is not meaningful as 1H07 net profit of MYR6.68 bln included profit and disposal gain from discontinued operations of MYR6.56 bln.
Profits from operations rose 72% YoY to MYR222.1 mln mainly on higher profit from the grains, flour and feedmilling division resulting from better selling prices for specialty flour and animal feed. Operating profit from sugar refining operations was flat at MYR70.3 mln, which was due to lower export sales volume, which offset the increase in margins from the drop in raw sugar prices.
Wilmar contributed MYR473 mln or 61% to group pre-tax profit, as its plantation and oilseeds & grains operations benefited from the strong commodity prices during the period. Wilmar’s earnings were also substantially boosted by forex gains, profit on disposal of two shipping vessels and fair value gain on the embedded derivatives of convertible bonds.
We are keeping our projected net profit of MYR1.17 bln for 2008 (vs. recurring net profit of MYR639.6 mln for 2007) driven by a higher share of profit from Wilmar.
Recommendation & Investment Risks
We maintain our Buy call on PPB but with a revised 12-month target price of MYR10.00 (from MYR13.30)
PPB share price performance has been impacted by the heavy correction in Wilmar’s share price, in our opinion. We believe the downside to Wilmar’s share price has been reduced given that its valuations are now on par with its regional peers (vs. a large premium previously). Our anticipation of a pick-up in palm oil prices in 4Q should also support a recovery in Wilmar’s share price, which we believe will be, in turn, positive for PPB’s share price performance
We continue to use a sum-of-parts method to value PPB but have lowered our target price due to the drop in peer valuations and Wilmar’s share price. We assign a 20% discount to the closing price of Wilmar to value PPB’s stake in the company because of PPB’s holding company status. For its other operations’ earnings, which mainly consist of profits from the grains trading, flour milling and sugar refining operations, we cut our assigned PER to 8x (from 9x) and roll over our valuation to 2009 earnings
Risks to our recommendation and target price include margin fluctuations arising from the movement of palm oil, raw sugar and wheat prices.
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