PPB Group (PPB) is one of our Top 10 BUYs in our 2QCY13 Investment Strategy. We like PPB for: i) its best 4QCY12 earnings among the big cap planters, ii) its 1QCY13 result that is likely to outperform its peers as well, due to its diversified earnings base, which safeguards it against low CPO prices, iii) the good prospect for its Grains Trading, Flour and Feed Milling (GFF) division with potential near term margin expansion, iv) its attractive valuations and v) the sweetener of a final single tier dividend of 13 sen (exdate: 15 May 2013). Our FY13-14E core net profits of RM851mRM865m are unchanged. Maintain OUTPERPERFORM on PPB with a Target Price of RM15.00 based on 20.9x Fwd PER of its FY13E EPS of 71.8 sen. The 20.9x Fwd PER valuation is based on a -0.5 SD from its 3-year average Fwd PER.

PPB’s 4QCY12 results were the best among big cap plantation companies. Among the five planters* listed on FBMKLCI, only PPB earnings beat the consensus estimate during the 4QCY12 earnings season in February as its FY12 core net income of RM842m was 18% ahead of the consensus forecast of RM713m. The good set of results was due to the better than expected earnings from Wilmar and the margin expansion at PPB’s Grains Trading, Flour and Feed Milling (GFF) division in 4Q12. On a YoY basis, its 4QCY12 earnings growth also outperformed its peers as its core PATAMI grew 19% (peers: declines in the range of 20%-65%).

1QCY13 result likely to outperform peers as its earnings are shielded against low CPO prices. Among the big cap planters, we believe only PPB can register positive YoY earnings growth in the next earnings season in May. Tentatively, we expect PPB’s 1QCY13 core earnings to improve in the range of 15%-20% YoY as the better performances of Wilmar’s Oilseed and Grains (OAG) division (turnaround in soybean crushing margin) and the Palm and Laurics (PAL) division (downstream capacity expansion by >20% in Indonesia) should be more than enough to cover the expected lower earnings from the Plantation and Palm Oil Mills (PPO) division (low CPO prices). In addition, Wilmar’s Consumer Products division should benefit from low CPO prices as a result of a lower feedstock cost and stable selling price for high-end cooking oils in China.

Good prospect for PPB’s Grains Trading, Flour and Feed Milling (GFF) division too. The GFF division’s long-term growth prospect is positive given its presence in the low flour consumption per capita countries such as Indonesia and Vietnam. Additionally, we think that the division earnings could surprise on the upside in FY13 if wheat prices stay low for an extended period. In the short-term, the GFF division’s 1QCY13 earnings should improve QoQ as wheat prices has declined substantially from US$9/bushel in Nov-12 to around US$7/bushel recently. Note that this division accounted for 15% of PPB’s PBT in FY12.

Attractive valuations, including a net dividend of 13 sen. PPB is currently trading at 17.7x FY13E PER or at a 19% discount to its 3-year average Fwd. PER of 21.9x. The stock is also trading at a FY13E Fwd. PBV of 0.98x or at a 28% discount to its 3-year average Fwd. PBV of 1.36x. We believe the relatively high discount to its long-term average valuation indicates the limited downside risk from its current level. For the immediate term, PPB’s downside should be supported by its book value of RM12.04 as at end-2012. Lastly, the last sweetener will be its final single tier dividend of 13 sen announced in late-Feb (ex-date: 15-May-2013).

Source: Kenanga