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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Wed, 17 Jul 2019, 9:47 AM

 

Sime Darby - Spinning Off Plantation and Property

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We are positive on SIME’s plans to spin off its Plantation and Property segments for value unlocking and balance sheet improvement. No changes to earnings estimates. If both segments are listed at our assumed valuations with SIME maintaining 51% holdings, these imply RM27.2b in cash raised. Then, assuming 50% pay-out, shareholders could see a RM2.00 bonus dividend while SIME reverts to a net cash position. Upgrade to OUTPERFORM with a higher TP of RM9.88 based on Sum-of-Parts after re-rating Plantation and Property valuations closer to its peers as value is being unlocked.

Confirms Plantation & Property spinoffs. Sime Darby Berhad (SIME) plans to list its Plantation and Property segments as pure sector plays while Trading & Logistics businesses will remain listed under SIME. No timelines or how the spin-off will take form, though we expect further follow-up by management in the coming 2Q17 results release and briefing at end-Feb. We expect the listing of its Plantation and Property segments to be the largest in their respective sectors, from both land bank and market capitalization perspectives.

An exciting catalyst. We are positive with this move which should unlock value in both spinoffs, while substantially improving SIME's balance sheet position and potentially providing a bonus to shareholders in the form of dividends or shares in the new companies. It has been widely speculated that the company intends on unlocking trapped values within SIME. While details are scant, we have done a back-of-the-envelope scenario analysis as elaborated overleaf. We assume SIME maintains a 51% stake in both businesses with potential Plantation market cap of RM39.5b (Fwd. PER of 26.0x) vs. the current biggest planter, IOICORP at RM29.1b market cap. Meanwhile potential Property market cap could be RM15.9b (40% RNAV discount) compared to its next largest competitors, IOIPG and SPSETIA have market capitalisation at RM9.3b.

Maximising value. Based on our speculated scenario, where SIME maintains a 51% stake in each entity, we estimate SIME could raise some RM27.2b from this exercise, with Plantation fetching RM19.4b and Property raising RM7.8b. This represents cash per share of RM4.10. Assuming SIME retains 50% of the funds raised and pays out the rest as dividends, this could represent a bumper dividend of RM2.00/share or 22% of current share price. With the remaining funds, we would expect SIME to enter into a net cash position from current net gearing position of 0.4x. Note that under the same 51% ownership structure, we estimate that SIME's FY17-18E CNP could be reduced by 40-27% to RM1.42-1.70b, once we exclude the non- controlling interest in Plantation and Property.

Upgrade to OUTPERFORM with higher TP of RM9.88. As noted above, we raise our Plantations applied PER to 26.0x (from 24.0x) reflecting a slight premium to its closest peers. Meanwhile, we shift our Property valuation method to RNAV (from 11.0x Fwd. PER) with a 40% RNAV discount, which we note is slightly more conservative than peer big cap developer IOIPROP's listing RNAV discount of 35%. We believe this move to unlock shareholder value is an exciting re-rating catalyst considering the potential for a substantial cash payout while maintaining business as usual in the respective segments. Thus, we upgrade our call to OUTPERFORM (from MARKET PERFORM) with a higher TP of RM9.88 (from RM8.60) based on Sum-of-Parts.

Source: Kenanga Research - 27 Jan 2017

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