By Xavier Kong
UOB Kay Hian (UOBKH) initiated coverage on PPB Group Bhd with a “hold” call and a target price of RM15.40, with the initiation due to the group’s margins which remain better than their peers, PPB’s strong presence in the Malaysian consumer market, as well as the group being a proxy to Wilmar’s growth.
The research house also noted that PPB is a defensive play as, historically, the group has outperformed the market in times of high volatility.
PPB’s core businesses are grains trading, flour and animal feed milling, along with other downstream activities such as livestock farming, food processing, baking, as well as marketing and distributing consumer products. The group has diversified into environmental engineering and waste management, contract manufacturing, chemicals manufacturing, property development and management, as well as packaging operations.
The group has maintained a good earnings track record across commodity cycles, according to UOBKH, along with margins that are better than peers, due to the cost and pricing advantages the group enjoys through leveraging on Kuok Group’s sourcing, logistics, and distribution networks. The research house noted that “centralised sourcing, with better access to market information and pricing, is key to PPB’s outperforming peers in a volatile commodity market”.
PPB also maintains a strong presence in the Malaysian consumer market, with a 45% share of the flour market, as well as a 40% share of the cinema market. The group is also one of the largest domestic bread suppliers.
“Sales of consumer products contribute close to 25% of group pre-tax profit, making PPB a good proxy to the resilient consumer staples spending in Malaysia. PPB also carries strong household brands in Malaysia, such as Neptune, Anchor, Blue Key, Massimo and Seri Murni. Its consumer division distributes third-party products that focus on the consumer segment; the key brands are Johnson & Johnson, Goodmaid, Jordan and Snow,” noted UOBKH.
PPB also stands as a local proxy to Wilmar International, due to 70% of the group’s pre-tax profit coming from Wilmar, who is also a beneficiary of low commodity prices with good downstream palm margins on the “favourable new regulations designed to encourage production of more value-add products and biodiesel in Indonesia”.
Moving forward, the group expects the cinema segment to drive earnings growth, with Golden Screen Cinemas operating 292 screens in 32 locations across Malaysia, along with plans to add seven more cinemas in the next two years. The segment will also be supported by a strong lineup of films slated for release in 2016, according to UOBKH.
However, the property segment of PPB will likely continue to see headwinds, considering the current market is seeing most developers focusing on selling unsold units while holding back new launches. Lending liquidity should also remain challenging, unless positive monetary measures are announced.
To date, PPB is completing the construction of a residential project in Taman Tanah Aman in Bukit Tengah, which is expected to obtain the code compliance certificate by the end of the first quarter of 2016, with 70% of the project already sold.
For the Southern Marina Residences project in Johor, however, the group has seen only 30% of phase 1, which is made up of two condominium towers with a total of 456 units, sold since the soft launch in January 2015. The group has also decided to hold off on announcing the official launch dates of phase 2 and 3 due to the weak market sentiment.
Still, the group has a strong balance sheet with a nett cash of RM526 million, which would allow the group to take advantage of the currently weak market sentiment to explore decent mergers and acquisitions deals to further expand its business.
As of the noon close, PPB shares were last traded at RM15.68, down 16 sen.
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