PPB in final lap of flour business buy

SINGAPORE: Billionaire Robert Kuok’s PPB Group Bhd will soon complete the purchase of a 20% stake in Wilmar International Ltd’s China flour-milling business.

PBB sold 20% of its flour milling arm FFM Bhd to the Singapore-listed global agribusiness group, which is run by Kuok’s nephew, last December.

“It should be completed in the next couple of weeks,” Kuok Khoon Hong, Wilmar chairman and CEO, told The Edge in Singapore last Friday. The value of Wilmar’s flour-related businesses in China was not disclosed when PPB announced its intention to take the 20% stake late last year.

In May, PPB Group chairman Oh Siew Nam told reporters due diligence on Wilmar’s flour-related businesses in China was “going on well and should be completed by year-end”.

Earlier in February, Wilmar — when announcing the completion of its RM378.12 million purchase of the 20% stake in FFM — said FFM’s wholly-owned Waikari Sdn Bhd was reviewing terms and documentation pertaining to the proposed exercise, which would be subject to regulatory approvals.

It is not immediately certain if the 20% stake in Wilmar’s flour-related business will also include an interest in a new plain noodle manufacturing business in China, which does not compete directly with instant noodle brands as it requires users to add their own flavouring, said the younger Kuok. He thinks the instant noodle business is already crowded with strong players. “There are ample other opportunities in Asia,” he said.

Wilmar’s expansion into other consumer businesses like flour, rice and now noodles in populous countries like China, Indonesia and India “will eventually be very significant earnings drivers for the group”, said Kuok, who also sees the current bearish market sentiment as an opportunity to snap up good assets in the agri-commodity and consumer space. “Hopefully we will find something good to buy.”

A good performance from Wilmar could stoke sentiments for PPB, which owns 18.3% of Wilmar and counts the latter as its largest earnings driver.

Wilmar reported on Aug 12 a 14% rise in earnings to US$393.1 million (RM1.1 billion) for 2QFY11 ended June 30 on the back of strong margins in its palm oil business. Numbers would have been 5% stronger at US$403.9 million against US$386.2 million in 2QFY10 had it not been for a fair value loss on derivatives. Revenue for the quarter was up 56% year-on-year at US$10.6 billion driven by higher agri-commodity prices as well as contributions from its new sugar business.

For 1H11, Wilmar’s revenue rose 48.6% to US$20.1 billion from US$13.52 billion the year before while net profit was up 4.5% to US$779.8 million from US$745.9 million in 1H10. Wilmar, the leading edible oil player in China, sees 60% of its earnings from the country.

“The group remains positive on its prospects despite a challenging operating environment in China and uncertainties in the global economy. Asian economies will continue to see strong growth and the group expects to benefit from its integrated business model and its investment in new and existing businesses,” Kuok said in a statement accompanying Wilmar’s earnings release.

“As one of the largest suppliers of edible oils, we believe Wilmar should continue to do well. Its dominance in the world’s first, second and fourth most populous countries means that its volume growth should continue to remain resilient, despite weaker prospects in the developed economies,” DBS Vickers Securities’ analyst Ben Santoso wrote in a Aug 15 note, retaining a “buy” and S$6.25 (RM15.49) target price.

UOB-KayHian Research, which also valued Wilmar at S$6.25 apiece, on Aug 15 upgraded the stock from “hold” to “buy” following recent weakness seen in its stock price. “Earnings in 2H11 are expected to be stronger coming from better margins from its consumer pack and crushing business and strong profit from its sugar divisions,” it said.

PPB, which last month expanded into the sliced-bread market in Malaysia, is expected to release earnings for 2QFY11 ended June 30 next week.

KAF Seagroatt & Campbell Research on Aug 11 retained a “buy” on PPB with a RM19.60 target price, according to Bloomberg data. AmResearch last month also retained a “buy” with a RM19.35 target price, while HwangDBS-Vickers Research deemed PPB “fully-valued” at RM16.30 in May.

PPB rose as much as 38 sen or 2.26% to close at RM17.18 yesterday, a shade below the RM17.20 it reached intraday. Wilmar rose as much as five cents or 1% intraday to S$5.18 yesterday before closing at S$5.14, up one cent or 0.19%.