We recently visited Padiberas Nasional Berhad ('BERNAS') and believe that the company's long term prospect remained intact. BERNAS is primarily involved in the procurement, importing, buying, processing and selling of rice, rice by-products and paddy. In 2011, BERNAS received a renewed mandate from the Malaysian Government to import rice for Malaysia for the next 10 years. We like BERNAS for its long term sustainable earnings, attractive valuation of 9.0x Fwd PER (30% discount to MSM Fwd PER of 13.0x) and superior FY13E dividend yield of 8.9%. We value BERNAS at RM3.90 based on 10x Fwd PER of its FY13E EPS of 39.0 sen. Our 10x Fwd PER valuation is based on a +1SD over its 3-year average Fwd PER.

Sustainable earnings for the next 10 years. BERNAS is primarily involved in the 1) procurement and processing of paddy and 2) importation, warehousing, distribution and marketing of rice in Malaysia. The company has been granted a 10-year extension to import rice for Malaysia. Some of BERNAS' products include brown, fragrant, glutinous, broken, white, basmati and parboiled rice. BERNAS currently controls about 24% of the paddy market and 45% of the local rice demand.

Deep in value.  Based on its FY13E earnings, BERNAS is trading at Fwd PER of 9.0x or at a 30% discount  to MSM Fwd PER of 13.0x. We believe this is unjustified as both companies control a significant portion of the local market in their respective businesses (MSM  in  sugar,  BERNAS  in  rice).  In addition, BERNAS' dividend payout of 75% surpassed MSM's level of 51% in FY11. 

More dividends to come?  In FY11, BERNAS' net dividend surged 38% YoY to 26.25 sen as the company increased its payout to 75% (from 50% in FY10). As BERNAS has yet to fully utilise its Section 108 credit, we believe that its FY12E-FY13E dividend payouts may rise to the range of 80%-90%. Hence, we expect FY12E-FY13E net dividends of 27.7sen-31.2sen, a very generous yield of 7.9%-8.9%. As all Malaysia listed Company  will  need  to  comply  with  single tier tax system latest by 31-Dec-2013, any section 108 account balance will be forfeited if it is not utilised.

Getting more efficient.  BERNAS' 'Program Rakan Ladang' (PRL) program has successfully raised the productivity and crop quality of local farmers. This is done through the application of good agricultural practices. We gather that 28,458 farmers have benefitted from the PRL Program, which saw yield increased by 10%-20%  in paddy planting areas such as Perlis, Krian, Selangor and Kedah.

Better FY13E earnings.  FY12E earnings should decline 12% YoY to RM145m as we expect stronger average USDMYR rate of 3.10 (+1.4% YoY). However, FY13E earnings should improve 26% YoY to RM183m as we expect lower USDMYR rate of 3.06. As BERNAS purchase its imported paddy  in USD,  lower USDMYR  rate  in FY13E will reduce overall Group cost, hence higher earnings.

Risks. The possible return of El Nino may cause paddy price to surge if the global major planting lands for paddy are affected by the dry weather. Hence, BERNAS' margin may be squeezed significantly. However, El Nino is not confirmed yet by both the Australian Bureau of Meteorology and the United States Climate Prediction Centre at the current juncture.