20 Apr 2012
- Maintain HOLD on PPB Group Bhd, with an unchanged fair value of RM17.45/share, which is based on a PE of 19.5x on FY12F EPS.
- In the past five years, PPB’s historical PE band ranged from a low of 19.0x to a high 22.1x. Average PE was 20.6x. PPB’s 18%-owned associate, Wilmar International, is currently trading at 15x FY12F fully diluted EPS and 13.5x FY13F fully diluted EPS.
- We visited PPB’s Massimo bread factory yesterday. We found the plant to be clean and modern. Most of the processes are automated and the only labour-intensive segment is the packing section.
- The bread factory cost RM120mil to build. We reckon that the bulk of the cost was attributed to the heavy machinery and equipment, some of which were brought in from the US.
- There are no plans yet to increase the selling price of Massimo’s wheat germ bread. We reckon that PPB’s strategy is to improve its market share first even though it may result in the erosion of operating margins. The selling price of Massimo wheat germ is RM2.50 for a 400gm loaf. This is just 10 sen more expensive than the white bread.
- PPB has started selling Massimo bread to other markets such as Ipoh, Penang, Malacca and Seremban. This would allow the group to expand its market penetration beyond the Klang Valley.
- The group also plans to increase the number of its products. Currently, PPB sells the wheat germ loaf, white bread loaf and cream rolls. There are two types of single cream rolls and two types of double cream rolls.
- We understand that consumers have responded well to PPB’s bread products. Word of mouth has been instrumental in the acceptance of the bread. PPB has also advertised in newspapers and television to promote the bread.
- There is no expansion plan yet. Presently, the bread factory has the capacity to produce 10,000 loaves per hour and 24,000 cream rolls every hour. The bread factory encompasses an area of 22,000 sq metres, which is the size of two football fields.
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