We are upgrading our recommendation on PPB Group (“PPB”) to an OUTPERFORM from a MARKET PERFORM with an unchanged Target Price of RM15.20. In our view, PPB’s current share price offers an attractive valuation for long-term investor to accumulate. It recently registered a robust 1H13 net earnings growth of 38% to RM395m. In the medium-term, PPB could benefit from Indonesia’s latest biodiesel policy as earnings contribution from Wilmar should increase. Besides that, PPB’s own business division has also performed well in 1H13. We recommend long-term investors to accumulate PPB as we expect 12-month total return of 15.4% with Target Price of RM15.20. This is based on 20.9x Fwd PER on its FY14E EPS of 72.7 sen.

Attractive valuation now. After our downgrade on 7-Aug-2013 to MARKET PERFORM, its share price has declined 11% to RM13.34 as of 5-Sep-2013. As the fundamentals remain intact with no negative news-flow, we think PPB has been unjustifiably swept along in the tide of negative sentiment. We think that its current share price has reached an attractive level for long-term investor to resume accumulating. This quality stock is now trading at 18.6x FY13E PER or at a 15% discount to its 3-year average Fwd. PER of 21.9x. Additionally, PPB is trading at FY13E Fwd. PBV of 1.06x or at a 22% discount to its 3-year average Fwd. PBV of 1.36x.

Good earnings growth so far with 1H13 core earnings surging 38% to RM395m. This was mainly contributed by higher earnings contribution from Wilmar (+44% to RM300m) which has successfully maintained positive margin for its Oilseeds and Grains (“OAG”) division against losses incurred in 1H12. Against its peers, 2Q13 earnings growth of 61% to RM174m is the strongest among plantation companies under our coverage. We believe this is due to its more diversified earnings which have lessened the impact of low CPO prices to its earnings compared to other planters.

Could benefit from Indonesia’s latest biodiesel policy. We believe that PPB stands to benefit from the recent Indonesia’s plan to raise the biodiesel proportion in fuel to 10.0% (from 7.5%) as earnings contribution from Wilmar should increase. Given Wilmar’s status as the world’s largest palm biodiesel producer with seven biodiesel plants in Indonesia (estimated capacity of 1.75m mt), we believe that Wilmar should benefit from higher volume of palm biodiesel processed. We believe a small increase in sales and profit should be seen in FY14E with full implementation expected in FY15E-FY16E.

PPB’s own business division doing well too with almost all of them registering earnings growth so far. The star performer is the “film exhibition and distribution” (“Film”) division which registered PBT growth of 40% to RM27m. We gather that this is due to contribution from new cinemas opened in 2012 and 1H13, improved film distribution and screen advertising revenue. The “flour, feed milling and grains trading” (“Flour”) division also did well with PBT growth of 5% to RM69m and its long-term outlook remain bright due to its expansion plans in China, Indonesia and Vietnam. Earnings and Target Price unchanged. We maintain our FY13E-FY14E core earnings of RM851m-RM861m and our Target Price of RM15.20. This is based on a Fwd. PER of 20.9x on its FY14E EPS of 72.7 sen. The 20.9x Fwd PER valuation is based on a -0.5 Standard Deviation from its 3-year average Fwd PER. We have chosen -0.5 Standard Deviation to account for its holding company discount on Wilmar. At current share price, we expect total return of 15.4% (upside 13.9% and dividend yield of 1.5%).

Source: Kenanga