News      PPB Group (“PPB”) announced that it had subscribed for a 40% stake in Huge Quest Realty Sdn. Bhd. (“HQR”) for RM52.6m. This amount will be funded via internally generated funds. Note that HQR owns a 70% stake in Southern Marina Development Sdn. Bhd. (“SMD”), a company which has purchased two parcels of land measuring about 12.5 acres in Puteri Harbour Nusajaya for RM182m.

The rationale for the deal is for PPB to participate in a property development project in Iskandar Malaysia. This is in line with PPB’s strategy to expand its property-based activities.

Comments      We understand that a piece of land sold by UEM Land in Jan-2013 in the area was transacted at RM211psf (Commercial North, Puteri Harbour). Although the prices paid by SMD for the Puteri Harbour Nusajaya land is higher at RM334psf, we think the premium pricing is justified due to its more prime location, the increasing interest in Iskandar in recent months and given our property analyst’s bullish view on the Iskandar property market.

We are positive on the deal as increased earnings from the property division should strengthen the group’s non-Wilmar earnings contribution. However, the division’s PBT contribution is small at an estimated RM17m or 2% of the group’s PBT in FY12. Hence, we expect only minimal impacts on our FY13E-FY14E earnings.

Outlook     Its near term outlook will still hinge on the earnings contribution from Wilmar, which contributed RM694m or 76% of the group’s PBT in FY12.

We believe Wilmar’s 1Q13 earnings (to be released on 8 May 2013) should improve YoY due to the better prospects at both its soybean crushing margin division and its palm oil downstream division.

Forecast      Maintain our FY13E-FY14E core net profits of RM851m-RM862m.

Rating     Maintain OUTPERFORM

Valuation      Maintain our Target Price of RM15.00 based on a Fwd. PER of 20.9x on FY13E EPS of 71.8 sen.

Risks      Lower than expected margin for Wilmar’s soybean crushing division.

Lower than expected margin for Wilmar’s palm oil refineries.

Source: Kenanga