Investment Highlights

• We maintain BUY on PPB Group with a lower fair value of RM19.30/share vs. RM19.90/share previously. Our fair value for PPB is based on FY23F PE of 15x. Due to the allegation of price fixing, we have reduced PPB’s ESG rating to 3 stars from 4 stars. Hence, there is no longer a premium to fair value for a 4-star ESG rating.

• FFM, an 80% subsidiary of PPB, has received a notice of proposed decision, from the Malaysia Competition Commission (MyCC). FFM has allegedly engaged with other parties to fix poultry feed prices from early 2020 to mid-2022. The other parties are Leong Hup International, Gold Coin Group, M Flour’s poultry unit and CP Malaysia.

• In a press briefing, MyCC said that the findings were provisional and it should not be assumed that the parties have broken any law. Also, the companies can submit their representation within 30 days of the receipt of the notice of proposed decision.

• The final decision will be announced in October 2022. The financial penalty can be up to 10% of the companies’ turnover during the period of infringement.

• Assuming the 10% penalty is on feed milling turnover, we estimate the penalty to be RM34.1mil. This assumes that feed milling accounts for 5% of PPB’s grains and agribusiness turnover of RM6.8bil in FY20 and FY21. The penalty would reduce PPB’s FY22E net profit by 2.3%.

• If we assume that the 10% penalty is on the entire grains and agribusiness division turnover of RM3.1bil in FY20 and RM3.7bil in FY21, the penalty would be about RM682.5mil. This would reduce PPB’s FY22E net profit by 45.6%.

• We believe that feed milling is only a small part of PPB’s business. PPB’s grains and agribusiness division has flour milling, feed milling and livestock farming activities. On a group basis, more than 80% of PPB’s pre-tax profit come from 18.6%-owned Wilmar International.

• We reckon that the price fixing penalty, if any, is one-off. PPB’s net profit is expected to recover in FY23E on the back of higher earnings from all of its divisions. The grains and agribusiness division is envisaged to benefit from lower soybean, corn and wheat costs. The film exhibition and distribution unit is anticipated to benefit from higher patronage and spending.

Source: AmInvest Research - 8 Aug 2022