Kenanga Research yesterday cut its core net profit forecasts for PPB by 3.1% and 1.6% for the financial years ending Dec 31, 2019 and 2020 respectively to RM1.17bil and RM1.21bil.
KUALA LUMPUR: Kenanga Research is cautious on PPB Group's near-term prospects and retains an Underperform call and target price of RM16.60.
It said on Friday PPB's key segments (grains and agribusiness, consumer products, film exhibition) could see better top-lines but with mixed earnings prospects.
“High investments are in place to enable sustainable growth opportunities from here. The engineering segment could be supported by higher project bids but property is expected to be slow,” it said in a report after a meeting with PPB management the previous day.
Sales from the grains & agribusiness segment in FY18 improved with a higher demand from food manufacturers, but suffered from higher wheat prices that inflated production costs.
While commodity trends are expected to remain volatile, management aims to maintain focus in gaining market share and drive better economies of scale for greater cost savings.
PPB Group's proposed investments of RM401mil into China and Vietnam over four years will bolster its presence in these regions.
As for the consumer segment, revenue fell short on weaker demand that could have been dampened by soft economic conditions. Additionally, higher wheat prices could have dragged the segment’s profit.
“While previous efforts included introducing new products, the group hopes for top-line performance to be driven by a higher distributorship profile backed by a larger product profile. Furthermore, the commissioning of an upcoming halal-certified frozen food production facility in 2Q19 will open up wider market opportunities,” it said.
As for its cinema operations, the egment benefited from better ticket sales, average ticket prices and reception from co-produced movies.
“Going forward, the segment appears poised to expand with the re-opening of refurbished halls of existing cinemas. Additionally, two more location openings (year-to-date: 36 locations) and the planned refurbishment of other high footfall locations could fuel ticket sales,” it said.
Kenanga Research said up to nine new cinemas are earmarked to be opened by FY22. While the former two segments are expected to see earnings risks mainly from higher operating costs, this segment could continue to enjoy stable margins given its leaner operating structure.
Outlook for the environmental engineering & utilities will be driven by a higher order-book of RM320mil and tender-book of RM370mil.
“We believe this is mainly for the water treatment and sewage systems,” it said.
For the property division, growth could be muted by the slow take-up rate of the Megah Rise project, which is expected to be completed by 2021.
“Post-meeting, we leave our FY19E/FY20E earnings unchanged, as we believe the abovementioned factors have been sufficiently accounted in our forecasts.
“The overall challenge of the group is to weather through the challenging macro environment, but we are not overly concerned given the group’s scale and market presence.
Additionally, its associate Wilmar is expected to continue contributing c.70% of the group’s PBT, with its earnings looking to improve from recovering soy crush margins,” the research house said.
Kenanga Research said as the group is likely to see softer fundamentals in the near term and valuation is expensive, it recommends investors to take profit.
“Moreover, the heavy investments into its businesses are also only expected to generate returns in the long run, given its four-year time frame.
“Note that our TP has not reflected the potential listing of Wilmar’s China business due to a lack of details and unknown timeline. We will relook at our valuation basis with an upward bias pending more details,” it said.
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