PPB Group may see improved profit margins

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UOB Kay Hian (UOBKH) Research said it has changed its call to 'buy' from 'sell', (File pic shows one of the company's project.

PETALING JAYA: PPB Group Bhd is expected to make a turnaround, following improvement in profit margins from its diversified businesses, slated by the third quarter of 2022 (3Q22) onwards.

According to UOB Kay Hian (UOBKH) Research, the group’s prospects will be supported by its consumer-related segment, which is enjoying lower raw material costs and healthy sales volume.

This is followed by the group’s film exhibition and distribution business that is turning black with 100% seating capacity since June, coupled with more movies being lined up for the second half of 2022 (2H22), as well as a stronger contribution from its associate company, Wilmar International Ltd.

Given these positive factors, UOBKH Research has upgraded the stock from a “sell” to a “buy” call with a higher target price of RM18.55.

For PPB’s grains and agribusiness segment, UOBKH Research noted that wheat is the key raw material, which accounts for 80% to 90% of the cost of sales.

“We reckon that margins would improve on the back of upward price adjustments and lower raw materials prices, especially wheat, which has dropped by 29% since its recent peak in June.

“With this, we expect this segment to see better margin improvement and healthy sales volume, and hence turn black in 3Q22,” it added, and noted that this segment contributed about 45% to 50% to the group’s operating profit.

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In addition, the group’s consumer products segment is slated to remain stable.

The research house said: “We expect higher margins for consumer products, thanks to a better procurement strategy and supply chain management.”

The sales volume is also expected to be satisfactory in 2H22 as the products are mainly consumer staples, it added.

Meanwhile, the group’s film exhibition and distribution segment is set to return to the black in late 3Q22 or 4Q22, it said.

“With most of PPB’s cinemas back to 100% capacity, we expect this segment to turn black with more audiences returning to the cinemas and more movies lined up this year,” it noted.

Citing strong contributions from Wilmar, UOBKH Research expects PPB’s group core net profit to improve significantly in 2Q22 and 3Q22 with Wilmar’s net profit increasing 20% in 2Q22.

PPB will also benefit from the appreciation of the Singapore dollar, given “Wilmar’s earnings are reported in Singapore dollar, while PPB’s earnings are in ringgit,” it added.

Operational-wise, PPB group has allocated a capital expenditure of RM832mil for the next five years, with RM388mil for the investment in flour mills in China, silo and maize facility in Pulau Indah and the implementation of SAP Enterprise Resources Planning system.