PublicInvest Research

Author: PublicInvest   |   Latest post: Wed, 24 Jul 2019, 10:26 AM


Sime Darby - Get Set For Demerger

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Sime Darby has finally rolled out its long-awaited demerger exercise plans yesterday, which divides the Group into three entities, namely, Sime Darby Plantation Bhd, Sime Darby Property Bhd and Sime Darby Bhd. We welcome the news as it helps maximize shareholder returns by unlocking the asset value of each core entity as valuations will be more attractive being a pure play business entity rather than a giant conglomerate. We think that the plantation arm will be the first vehicle to kick-start the demerger plans due to the current bullish CPO price environment. Since the beginning of the year, Sime Darby?s share price has registered an 8.8% gain in anticipation of this, well exceeding the KLCI?s gain of 3.1%. Pending more updates on the demerger exercise plans, we maintain our Outperform call with an unchanged TP of RM9.30.

  • Started planning since 2010. The idea of a demerger has been in the pipeline since the appointment of Tan Sri Dato? Seri Mohd Bakke Sallleh as Sime Darby?s Group CEO in 2010. The core businesses were divided into Plantation, Property, Industrial, Motors and Logistics with each core entity having its own board of management and led by respective division heads. Since then, there were already plans to do initial public offerings for the property and motor segments. The plans were put on hold or subjected to further delays due to uncertainties over market outlook and poor market sentiment for the respective sectors however.
  • Plantation arm en-route to becoming the biggest listed plantation company in Malaysia. Based on its gigantic planted land bank area of 603,254ha spanning across Malaysia, Indonesia, Papua New Guinea and Liberia, Sime Darby Plantation is set to become the biggest public listed plantation company in Malaysia while also being able to boast of having the largest planted land bank in the world,. Taking into the consideration its land bank size, regional footprint, FFB production growth, FFB yield, age profile coupled with the current strong CPO prices, we strongly believe the plantation arm should be able to attract healthy valuations for its public listing. Based on our preliminary studies, the market capitalization would likely be in the range of RM48bn-55bn or an estimated PER of 25x-30x.
  • Property listing might take a while. Based on its annual property sales of more than RM2bn, its property arm is also set to be one of the largest listed property players in the Malaysian market. It currently has total unbilled sales of RM1.2bn and targets to see more launches in the near term with a combined GDV of RM4.9bn. Current projects are mainly in the Klang Valley such as Elmina West, Bdr Bukit Raja. It also plans to unlock asset values in Labu and Pagoh (~owning about 15k ha), which will ride on the KL High Speed Rail and Malaysia Vision Valley developments. Its 13,000 ha in Carey Island could also be in play as the government plans to turn it into a massive industrial port city project with more than RM200bn investments. In addition, it is also starting to reap gains from the London Battersea Power Station project with the first property earnings to be recognized in 3QFY17. Based on our valuations, the property arm could be listed at an estimated market capitalization of not less than RM10bn. However, we think that the property listing might be in the later part of the year as property sentiment remains lacklustre currently.
  • Other business segments will be retained under Sime Darby Bhd. Industrial, motors and logistics as well as the healthcare segment will be parked under the current listed entity, Sime Darby Bhd. These segments collectively made up 31% of Sime Darby?s earnings in FY16. Based on our SOP-based valuations, the remaining assets in Sime Darby Bhd would be worth at least RM18bn It will be interesting to see whether Sime Darby Bhd would be able to maintain its current market capitalization or there will further value enhancement upon the listing of plantation and property segments. The successful demerger models of IOI Corporation and IOI Properties, and Telekom and Axiata are good references for Sime Darby Bhd.

Source: PublicInvest Research - 27 Jan 2017

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