PPB: Wilmar tie-up to bring long-term gains

KUALA LUMPUR: Faced with limited growth and thinning margins for its flour business here, billionaire Tan Sri Robert Kuok’s PPB Group Bhd is stepping up expansion in Indonesia and Vietnam, where operations are less regulated relative to Malaysia.

This year’s capital expenditure has been raised to RM267 million from RM190 million, largely due to doubling capacity of its flour mills in Indonesia to 2,000 tonnes/day, PPB managing director Tan Gee Sooi said after the company AGM last month.

The expansion in capacity takes place as the group finalises its acquisition of 20% of the first of several flour mills in China run by its 18.3%-owned associate Wilmar International Ltd, he added.

“We want to make sure the paper work is done properly,” chief financial officer Leong Choy Ying said, adding that completion of the stake acquisition in Wilmar’s other China flour mills should happen faster once the first transaction goes through.

Tan gave minimal details on the size of Wilmar’s flour business in China that PPB is buying nor its expansion plans save the fact that their partnership “makes a lot of business sense”.

“We won’t see a big impact [from the 20% stake] in the next few years on PPB, but in the longer term, there are a lot of synergies and strategic benefits of having Wilmar as a partner,” he said.

About 70% of revenue for FFM Bhd, PPB’s flour business arm, is from Malaysia, with 18% coming from Indonesia and 9% Vietnam. It also has a flour mill in Thailand. Given that the sale of a 20% stake in FFM to Wilmar was completed in March, PPB saw a slight dilution in its 2Q11 numbers, Leong said.

FFM’s flour business and contributions from Singapore-listed Wilmar form the bulk of PPB’s grains trading, flour and feed milling segment, which contributed 54.74% of the group’s RM1.26 billion revenue for 1H11 ended June 30, and 48.48% of the RM126 million earnings for the same period.

FFM has about 35% of Malaysia’s flour business, FFM managing director Ong Hung Hock said. Higher wheat prices pressured margins of its flour business, especially in Malaysia, where the price of general purpose flour is regulated at RM1.35 per kg, while it is sold at RM2.10 per kg in neighbouring Indonesia, he said.

FFM’s flour business is doing “fairly well” in Indonesia, though still “very small” compared with market leader Bogasari produced by Salim Group’s PT Indofood Sukses Makmur.

Like Wilmar, which is expanding in consumer staples like rice and sugar after capturing just under 50% of China’s branded cooking oil market and top three positions in the same business in India, Indonesia and Vietnam, PPB is also working on building long-term value by growing its consumer businesses by introducing more branded products. To counter thinning margins at its local flour business, PPB has diversified into the higher margin sliced bread business here.

After the soft launch in July, PPB’s Massimo branded bread is doing well, Tan said, but declined to reveal more details except that its RM110 million bakery complex in Pulau Indah, Port Klang, is capable of producing 10,000 loaves of bread an hour. “The bread business is only at the commissioning stage, so it’s too premature to speak of performance.”

PPB expects the broader consumer products division — which contributed 13.86% of top line and 7.09% of earnings in 1H11 — to perform well in 3Q11 due to increased trading during the Hari Raya celebration. It added that the outlook for consumer demand in Malaysia and the Asian region remains encouraging.

Tan reiterated that PPB had no plans to list Golden Screen Cinemas Sdn Bhd (GSC), which contributed 10.24% of group revenue and 17% of earnings for 1H11. “We have no problem financing growth ourselves, so it might be a long time before we consider listing anything.”

Koh Mei Lee, CEO of GSC, said 2012 would be another busy year with double-digit top line growth expected for Malaysia’s largest cinema operator with about 40% of box office market share. Having succeeded here, GSC is exploring opportunities to expand in other markets, including China, said Koh, adding that discussions are already under way with “a big Chinese firm involved in the cinema and entertainment industry.”

On contribution from Wilmar, which was lower at RM432 million in 1H11 versus RM452 million the year before, Tan said PPB is “still quite comfortable” with the latter’s performance.

As contributions from Wilmar’s newly acquired sugar business will start to kick in only in 2H11, analysts are optimistic of a better performance ahead.
Moreover, there may also be a lower base effect, given that Wilmar had incurred its first-ever back-to-back loss at its oilseeds trading business in 2H10.

Improved numbers from Wilmar could boost fortunes for PPB, which analysts still see as the largest mover for its earnings for the time being.

PPB had two “buy” calls versus one “sell” recommendation, according to Bloomberg data. KAF Seagroatt & Campbell Research is very bullish, valuing PPB at RM19.60 apiece, followed by AmResearch’s RM19.35 target price.

HwangDBS Vickers Research deemed PPB “fully valued” at RM16.30. PPB’s valuation “remains unattractive” at 17 times forward earnings, the research house said in an Aug 24 note, adding that it did not see any near-term re-rating catalysts for the stock.

“Our relative pick is Wilmar for a stronger, more liquid proxy to growing opportunities in China. On a relative basis, PPB Group’s share price also continues to outpace Wilmar and is trading at a premium,” HwangDBS said.

PPB lost 24 sen or 1.4% to close at RM16.80 yesterday and Wilmar shed 11 cents or 2.1% to end at S$5.06 (RM12.49).