We are initiating coverage on PPB Group (PPB) and recommend MARKET PERFORM and Target Price of RM14.60 based on 20.8x Fwd. PER on its FY13E EPS of 70.2 sen. PPB is a good proxy to Wilmar's steady long term earnings growth prospect via its 18.3% stake in Wilmar (one of Asia's largest agribusiness groups listed in Singapore Exchange with total market cap of ~S$20b). YTD share price has corrected 20% and is now trading at near trough levels (14% discount to 3-year Avg. Fwd. PE and 23% discount to 3-year Avg. Fwd. PB). Lastly, PPB's strong balance sheet (RM712m net cash) should enable it to grow its flour business market share in Southeast Asia (SEA). However, we believe near term catalyst hinges on Wilmar 'Oilseeds & Grains' division return to profitability. Wilmar's contribution to PPB Group's FY12-13E earnings will continue to be significant at 65%-69% of our estimated earnings of RM684m-RM832m.

Good proxy to Wilmar solid long term earnings prospect. PPB Group owns 18.3% share of Wilmar, Asia's leading agribusiness group with business operations in palm oil downstream, palm oil upstream, oilseeds and grains processing and other business operations. In our view, PPB is a good proxy to Wilmar long term growth as Wilmar contribution to PPB Group's PBT is very significant (75% of PBT in FY11).

YTD share price down 20% as 1H12 core net profit tumbled 47% YoY to RM287m. This is mainly caused by lower Wilmar contribution to PPB Group at RM209m (-52% YoY). Note that Wilmar 1H12 core net profit fall 53% YoY to US$378m as a result of US$93m Loss Before Tax (against 1H11: US$307m PBT) in 'Oilseeds & Grains' division. We gather that the loss in this division was caused by negative soybean crush margin in China and depreciation of Renminbi against US$.

Limited downside risks as valuations are near trough level. PPB Group is currently trading at 19.6x FY13E PE or 14% discount to its 3-year average Fwd. PE of 22.7x. The stock is also trading at FY13E Fwd. PB of 1.07x or 23% discount to its 3-year average Fwd. Price-To-Book of 1.39x. We think the relatively high discount to its long term average valuation reflects limited downside from current level.

Strong balance sheet to support growth.  PPB's strong balance sheet (RM712m net cash) should enable it to grow its flour business market share in Southeast Asia (SEA) given the region's strong economic growth prospect. Despite possible short term margin erosion, we think this strategy bodes well for PPB in the longer run as it should command better market presence in SEA in the future when the market become matured.

Expect weak FY12E but better FY13E.  PPB's FY12E core net profit should decline 30% YoY to RM684m in line with lower Wilmar earnings contribution as Wilmar's 'Oilseeds & Grains' division should register Loss Before Tax (LBT) of US$153m (against FY11 PBT of US$423m). However, we believe FY13E core net profit should improve 22% YoY to RM832m as Wilmar soybean crushing margin recovers.

But upside also limited until clear sign of recovery at Wilmar 'Oilseeds & Grains' is seen. Initiate with MARKET PERFORM. We believe Wilmar contribution to PPB Group earnings will continue to be significant in FY12E-FY13E at 65%-69%. Hence, we think key catalyst for PPB will be the return of Wilmar 'Oilseeds & Grains' division to profitability.

Source: Kenanga