Wilmar/PPB ... Sept09

Currently PPB holds a 18% stake in Wilmar Intl Ltd, and a few staple food businesses that include sugar and flour.

The Wilmar stake is precious to PPB as about 78% of its net profit for 1HFY2009 ended June 30 came from this investment. The contribution has even surpassed yearly expectations.

To investors, holding a share in PPB acts as a proxy to Wilmar and is cheaper. However, performance of the two counters of late (Till Sept 2009), many call a preference over Wilmar’s shares to PPB’s shares because the former has better upside. Direct exposure to Wilmar is one of the reason.

A research house said that based on discounted cash flow valuation while PBB is based on sum of parts valuation. Unlike PBB’s investment in Wilmar, PBB’s core divisions’ prospects appear unclear given the fluctuation of raw material prices, ocean freight charter rates and weakening consumer consumption.

PPB’s sugar division is the largest revenue and profit earner, accounting for 60% of operating profit. The sugar division is the only business that saw growth in operating profits in 1H2009 while the rest posted double digit declines. The live stock farming division recorded losses.

In terms of profit contribution, PPB’s core division accounted for about 20% of its net profit, which is tiny compared to the contribution from Wilmar.

While some prefer direct exposure to Wilamr, you cannot discount the fact that PPB offers a cheaper entry into the Wilmar group. There is a lot of value within the PPB business itself.

Based on PPB’s closing price of RM15.80, PBB’ market capitalization stood at some Rm18.73 billion. Stripping out the value of a 18% stake in Wilmar of RM17.88 billion, the market pegs a value of RM849 million on PPB’s core businesses.

However, this undervalues PPB’s core activities, as the businesses should be valued at not less than Rm2.4 billion, almost tripled the pegged value of RM849 million. The RM2.4 billion is based on the enterprise value and cash position of the respective divisions. When including PPB’s other investments, such as MayBulk the figure will jump to RM2.8 billion.

The market has hugely discounted PPB’s core activities. As the company is the business of producing staple food., it is hard to explain why the market gives the stock a very low valuation. Even at a time when Wilmar’s value nearly exceeded PPB’s market capitalization, the business was valued at zero.

Furthermore, PPB’s 50% share of the sugar and 40% of the flour market in Malaysia should warrant a commendable valuation, at least on its sugar and flour businesses.

Therefore, by owning a share in PPB, investors will also own a share in Wilmar and other business that are generating income.

At present, PPB is expanding its core businesses despite the economic slowdown. Furthermore , PPB has a long term contract with the government to supply 70% of its requirement for raw sugar at 17.5 US cents per lb lower than the market price.

It has hinted that it will eventually increase its stake in Wilmar and did not rule out participating in Wimlar’s recently proposed Chinese IPO.