buy maintained and top-pick status - rbs

Good report on PBG by RBS below:
Despite a challenging operating environment, we believe PBG will report a very strong 1H11 result, driven primarily by significant gross profit margin expansion
from an improved currency profile and cost base. We see the result as the first catalyst for re-rating and share price appreciation over the next 12 months. Buy.
We forecast EBITA growth of 35-40% for 1H11. The main operational growth driver is lower COGS due to more favourable foreign exchange rates (mid 80s AUD/USD for 1H11 versus high 60s for 1H10) and cost savings from increased offshore sourcing, which together should
drive significant expansion in the gross profit margin. This growth is despite our expectation for a weak sales number; we forecast a 1.5% decline in underlying sales in 1H11 (due to general consumer discretionary weakness and some price cuts in certain brands) and the negative impact of foregone revenue from divestments and discontinuations, leading us to estimate a 9.3% decline in 1H11 sales on the pcp.
We expect PBG?s strong operational growth to be complemented by an improved financial position, resulting in a materially lower interest rate charge and contributing to 1H11 NPAT growth of 70-80%. In addition, we expect solid cash flow conversion to allow PBG to resume
dividend payments in FY11. We expect the first of these to be declared with the 1H11 result, which PBG is due to report on 24 February.
On our estimates, PBG trades on about 8x FY11 PE. Our valuation methodology assumes PBG will continue trading at a discount to the broader market, but we believe the current share price does not capture the strong earnings growth outlook (for both 1H11 and FY11) or the improvement in balance sheet and earnings stability following the brand rationalisation and transformation program. We therefore view the stock as offering significant value at
current levels, and we believe the 1H11 result is likely to be a catalyst for re-rating. We maintain our Buy recommendation and highlight PBG as one of the top picks in our coverage universe. Our earnings estimates and A$1.45 target price are unchanged.