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StockStalk  |  JANUARY 12, 2016 11:30PM

PPB Group: Too reliant on Wilmar?

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StockStalk instory imageAnalysts appeared rather optimistic on PPB Group Bhd, which is the single largest shareholder of plantations firm Wilmar International Ltd, however, they also pointed out it is too reliant on the latter. Do investors need to be concerned?

Business model: PPB Group Bhd, which was incorporated in 1968, is listed on the Main Market of Bursa Malaysia. It is an investment holding company with businesses including grains trading, flour and animal feed milling industry as well as downstream activities such as livestock farming, food processing and consumer products distribution. Its main focus is in Indonesia, Malaysia, China, India and Europe.

According to its website, among the retail and commercial properties PPB owns are New World Park and the Whiteaways Arcade in Georgetown, Penang, a shopping complex (Cheras Leisure Mall) and an office building (Cheras Plaza in Taman Segar, KL). PPB Hartabina Sdn Bhd, a wholly-owned subsidiary of PPB, is its property development arm.

FFM Group, in which PPB has an 80% equity interest, owns and operates a total of five flour mills in the country and one each in Vietnam, Thailand and Indonesia. FFM Group has also 20% interest in nine associates in China with a combined flour milling capacity of 14,950 metric tonnes per day.

“PPB is also the single largest shareholder, owning an 18.3% equity interest in one of Asia’s largest integrated agribusiness groups, Wilmar International Ltd which operates in more than 20 countries across four continents,” the company said on its website.

“Apart from food manufacturing, PPB owns Golden Screen Cinemas Sdn Bhd (GSC), which is the largest film exhibitor in Malaysia with 233 screens in 27 locations nationwide, capturing about 40% of domestic box office collections,” it said.

The company also said that its strategic acquisitions and business ventures over the years have enabled it to successfully diversify its businesses to include, in addition to the above, environmental engineering and waste management as well as contract manufacturing and chemicals manufacturing, which are under the Chemquest Group, in which PPB has a 55% equity interest.

Shareholders and management: Leading the company is 51-year old Lim Soon Huat, PPB’s managing director. According to the company’s 2014 annual report, he was appointed to his current position in July 2012 and has been a director in the company since May 2008.

His qualifications include a Bachelor of Science (Honours) degree in Statistics from Universiti Kebangsaan Malaysia. He has “many years of management experience in the field of finance, commodities trading, consumer goods manufacturing and marketing, hotel investments, sugarcane plantation and sugar milling operations”.

He has also held various senior executive positions in the Kuok Group of companies in Singapore, Thailand, Hong Kong, China and Indonesia.

As of Jan 11, the major shareholders of PPB are Kuok Brothers Sdn Bhd with a 50.2% stake, the Employees Provident Fund (7.2%) and Retirement Fund Inc (3.5%).

PPB Gruop Bhd 1-year price chart 120116 01Share performance: Although its share price movement has been erratic of late, PPB earned a respectable one-year return of 11.98% as of Jan 11, according to Bloomberg data. This is not too bad considering the FBM KLCI only returned -2.61% during the same period.

Trading in the stock is also less volatile than average, indicated by the 0.73 beta coefficient value assigned to it by Reuters. (Note: Trading in a stock is volatile when its beta coefficient is 1 and greater.)

What analysts think: UOB Kay Hian, which initiated coverage on the stock with a “hold” rating on Monday, said it likes PPB for its better-than-peers margins, leveraging on the Kuok Group’s scale, strong presence in the Malaysian consumer market and being a proxy to Wilmar’s growth. “PPB is also a defensive play as historically, it has outperformed the market in times of high volatility,” it added in a report on Monday.

It noted that PPB’s share price is highly correlated with Wilmar, as 70% of the company’s pre-tax profit comes from the latter. “Wilmar is 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,” it said, adding that PPB’s earnings are more resilient as it has the most integrated business model in the sector.

According to UOB Kay Hian, PPB’s management plans to add seven GSC cinemas in the next two years, which will be the key earnings driver for the company. “In addition, the cinema business will be supported by a strong line-up of films. Numerous famous films are slated to be released in 2016, such as ‘From Vegas to Macau 3′ and ‘Railroad Tigers’ (by Jackie Chan), which could drive up admission income,” the research house said.

PPB’s property segment, however, remains weak, UOB Kay Hian pointed out. “Most developers are focusing on selling unsold units while holding back new launches. Lending liquidity should remain challenging unless positive monetary measures are announced,” it added.

That said, PPB has a strong balance sheet, UOB Kay Hian said. “PPB’s strong balance sheet (RM526 million nett cash) would enable it to take advantage of the current weak market sentiment to explore decent mergers and acquisitions (M&A) deals to further expand its business.”

Meanwhile, AllianceDBS Research, which also has a “hold” rating on PPB, said that while it has a “buy” on Wilmar, it believes PPB’s share price has largely priced in the potential upside of its stake in Wilmar, in addition to fair valuation of its other businesses and holdings.

“PPB’s share price movement is highly correlated to that of Wilmar and as such, a de-rating of Wilmar presents downside risk for PPB as a premium is already implied at its current price,” the research house cautioned. “The key risk to Wilmar’s earnings is a sustained downturn in crude palm oil and refined product prices.”

It also cited a slowdown in regional consumption growth as a key risk. “Due to their line of businesses, both Wilmar’s and PPB’s earnings are driven by economic and consumption growth in Asia. A broad slowdown on this front will affect the earnings of both companies,” AllianceDBS said.

Earnings forecast:

Earnings-forecast-for-PPB-Group-Bhd-120116-01

StockStalk: There are a few points about PPB that investors shouldn’t ignore. One, it is backed by the Kuok family and has a diversified business, which should help it withstand any shock arising from decreased consumer spending.

Two, PPB is the single largest shareholder in Wilmar, which contributes 70% of its pre-tax profit according to analysts, which is a double-edged sword. If Wilmar doesn’t perform and PPB’s share price does hinge on it as analysts say, then investors are in for a huge disappointment.

So yes, while PPB appears to have diverse business segments, it is clear that it is very much dependent on Wilmar’s performance, which is a little worrying. KINIBIZ had requested comments from PPB regarding its business outlook this year and growth strategy for the next few years, however, we have yet to receive replies at the time of writing.

On a more positive note, PPB does have a strong balance sheet, which means it could engage in M&As to grow the business if need be, which should comfort the more nervous investors. All in all, PPB is a riskier investment than most because of the Wilmar factor and hence investors should exercise caution before jumping in.

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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.



 
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