KUCHING: Analysts are generally neutral on the prospects of PPB Group Bhd (PPB) as they expect the implementation of the goods and services (GST) tax will have mixed effect on the group’s key divisions.
However, the group could see consumer sentiments improving in the second half of 2015 (2H15) as the strong job market and low crude oil prices should be positive for consumer spending, and hence, support the group’s film exhibition and distribution business.
The research arm of Kenanga Investment Bank Bhd (Kenanga Research) in a recent report, said during an analysts briefing with PPB, the management viewed that the GST will have mixed effect on their key divisions.
“The environmental engineering, waste management & utilities (Engineering) division (one per cent of FY14A profit before tax) and ‘flour and feed milling, and grains trading’ (FFM) division (17 per cent of profit before tax) is likely to see minimal impact as the costs should be passed on to customers.
“The film exhibition and distribution business (six per cent of profit before tax) expects a temporary drop in admissions immediately after implementation, but due to a strong film line-up, they expect sales to normalise later in 2H15.
“The film division also mentioned that they are working with the government to reduce the 20 per cent entertainment tax on movie tickets to partly offset the hike in ticket prices.
“The property division (four per cent of profit before tax) thinks that the property sector downturn is likely to continue but due to lower launches and hence lower supply, property prices could rise post-GST,” the research firm said.
“Overall, we agree with management’s management’s view that consumer sentiment is likely to weaken in 2Q15 but things should improve in 2H15 as the strong job market and low crude oil prices should be positive for consumer spending.
“However, note that these segments contributed only 31 per cent of FY14 pre-tax profit (PBT), with the balance coming from their 18.3 per cent stake in Wilmar,” it opined.
Nevertheless, Kenanga Research sees good prospects in PPB’s film exhibition and distribution due to the 35 per cent growth by 2017.
“We gather that the film division is targeting 11 new cinemas by 2017 for a total of 42 locations (from 31 currently).
“Year to date, the company has already opened three new cinemas (Nu Sentral, IOI Putrajaya and Ipoh Parade) and the company plans to open another three at locations in Alor Setar, Bintulu and Klang Parade in 2015.
“We think the targeted 11 new cinemas by 2017 should be fully achievable as six locations (or 55 per cent) of the target 11 locations should be completed in 2015,” it viewed.
However, it pointed out that in the near-term, weaker consumer sentiment due to GST could limit demand in 2Q15.
On PPB’s FFM division, Kenanga Research said it remained neutral on the new plant capacity as we believe that FFM division’s earnings is dependent on the pricing of wheat (as input cost).
“Hence, the revenue growth expected from higher capacity may not translate directly to bottom line,” it added.
“Furthermore, we gather from management that production may take some time to be ramped up and profitability would be satisfactory only after four to five years of operation,” it noted.
Recall that the FFM division acquired 2.3 hectare of land in Pasir Gudang, Johor next to its existing plant to expand its feed milling activity. The group has also completed its Vietnam flour mill which has started operations and should increase milling capacity by 500 metric tons (MT) per day to total 19,750MT per day.
As for PPB’s property division, Kenanga Research noted that the management said that PPB’s 28 per cent-owned associate Southern Marina Development (SMD) has seen 50 per cent take-up rate in its Puteri Harbour project, mostly by local buyers, during their soft launch phase.
“We gather that there will be 456 units offered in Tower 1 and Tower 2, and prices start from RM880 per square feet.
“Management has mentioned that unbilled sales are currently at about RM150 million. While management acknowledged that the Johor property market is overall soft, they are positive on Puteri Harbor due to its strategic location (next to UEM’s private marina) and attractive pricing,” it said.
Nevertheless, Kenanga Research said it was neutral on the impact of the project as it believed its contribution to PPB’s FY15 PBT should be limited at RM17 million or two per cent assuming 20 per cent PBT margin.
All in, the research firm maintained its ‘market perform’ recommendation on the stock and noted that there is limited upside for PPB.