Tuesday, 25 September 2012

Billion Ringgit Club: Taking PPB’s gems beyond Wilmar’s shadow

Written by Cindy Yeap of theedgemalaysia.com
Tuesday, 25 September 2012

When “Sugar King” Tan Sri Robert Kuok decided in 2007 to spin off PPB GROUP BHD []’s oil palm PLANTATION []s and edible oils business to hold a sizeable stake in Wilmar International Ltd, led by his nephew Kuok Khoon Hong, he probably did not expect the Singapore-listed Wilmar to dictate PPB’s earnings and share price as it does today.

After all, Wilmar only began to make up more than two-thirds of PPB’s earnings two years later following the surprise sale of PPB’s sugar business the Malaysian government in January 2010.

Whatever the circumstances, analysts are finding it tough to make a case to call PPB a “buy” on its own merit today due to the volatility seen in the share price and profit of its 18.32% owned associate Wilmar.

“With over 70% of its earnings coming from Wilmar, you’re basically taking a view on Wilmar rather than PPB,” said one senior analyst.

While some of PPB’s own portfolio of businesses such as the Massimo bread business, are showing decent growth, the analyst points out earnings from PPB’s PROPERTIES [] and wastewater management businesses can also be volatile, while the flour milling and livestock farming business face thin margins and tepid utilisation rates. Even PPB’s film exhibition and distribution business under Golden Screen Cinemas (GSC) continues to face competition from smaller players and piracy.

“The only positive is that the group has been in the commodities and consumer businesses for a long time and if anyone can ride through the volatility, it would be them,” the analyst added. “Anyone who buys them has to take a long-term view.”

PPB’s new managing director Lim Soon Huat, 47, admits there is little PPB can immediately do to outrun Wilmar’s shadow.

Lim has been managing director for only two months, but he has been with the Kuok Group in Singapore, Thailand, Hong Kong and China for over 15 years and had been on PPB’s board as non-executive director since May 2008. Lim helped oversee the Kuok Group’s investments and operations in Indonesia, which include flour milling, sugar cane plantations, sugar milling and hotels,” PPB’s latest annual report read.

It remains to be seen if Lim’s appointment signals increasing investments by PPB in the archipelago where Wilmar has easily 20% of the branded cooking oil business.

“I’ll definitely be spending more time [in Kuala Lumpur] now,” Lim told The Edge Financial Daily on
sidelines of a recent briefing.

Both Wilmar and PPB’s stock prices skidded to their lowest in over three years after Wilmar announced its second back-to-back quarterly loss for its oilseeds trading business in the second quarter ended June 30 — the second such occurrence the past eight quarters since the second half of 2010.

As a result, profit contributions from Wilmar plunged 52% to RM209 million in the first half of 2012,
causing PPB’s group earnings to dip 46% year-on-year to RM302 million.

Both stocks rebounded last week after news got out that Wilmar made its first-ever share buyback on Sept 13, paying S$3 (RM7.50) apiece or S$22.19 million to purchase 7.39 million shares or 0.115% of its share base from the market.

As for PPB, Bursa Malaysia filings showed the Employees Provident Fund (EPF) among recent buyers of PPB shares as its stock plunged. The EPF had 9.92% of PPB as at Sept 6, up from 9.65% in late February.

For his part, Lim said PPB does not expect significant changes in contribution mix from its six business segments in the near term but promised PPB is working hard to grow its core businesses.

Of the RM104 million profit from PPB’s own businesses in the first half of 2012, some 63.5% were from grains trading and flour milling. Film exhibition and distribution contributed 18.8% to group earnings; properties 12.53%; consumer products 8.37%, waste management 4.88%, while the livestock business was loss-making.

He also gave little hints on whether PPB would consider spinning off GSC to get PPB back on the syariah-compliant investment list, and declined to outline a specific dividend policy for PPB apart from a commitment to return excesses to shareholders after considering its capital needs.

Some RM467 million has been earmarked to expand its flour, cinema and property businesses over the next two years, some 73% of which is to expand its flour businesses in China, Vietnam and Indonesia.

It is worth noting, though, that PPB and Wilmar were bound even more tightly together in December 2010 after PPB sold a 20% stake in its flour milling arm FFM Bhd to Wilmar. In return, FFM bought a 20%
stake in Wilmar’s flour milling businesses in China where flour mills are built to make other products like instant noodles as well.

Wilmar, which has some 50% of China’s branded cooking oil business, is keen to leverage its distribution strength to market other consumer products. On Sept 24, for instance, Wilmar announced a joint venture with New York-listed Kellogg Co, which owns the Kellogg’s and Pringles brands, to manufacture and distribute cereal and snacks in China.

The Kuok Group had just over 50% of PPB and about 32.35% of Wilmar as at May this year, including the 18.32% held by PPB. While Lim said PPB has no immediate intention of raising its interest in Wilmar, Singapore takeover rules allow the Kuok Group to buy up to 2% of Wilmar shares every six months without triggering a buyout. Singapore’s mandatory offer threshold is 30% and not 33%, as in Malaysia.

Some market watchers expect more of Robert Kuok’s agriculture and consumer-related businesses to eventually find their way into Wilmar’s fold, pointing out that PPB and Wilmar are already working together to expand the flour businesses in the region.

Analysts, however, are looking out for signs of a turnaround at Wilmar.

If Wilmar succeeds in beating expectations, PPB — which is among 144 companies that qualified as members of The Edge Billion Ringgit Club (BRC) for 2012 — would stand to gain.

This article is appeared in The Edge Financial Daily on 25 September, 2012.

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