Highlights

MIDF Sector Research

Author: sectoranalyst   |   Latest post: Fri, 19 Jul 2019, 10:02 AM

 

Sime Darby - Pursuing Pure Play Strategy

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INVESTMENT HIGHLIGHTS

  • Pursuing pure play strategy
  • Sime Darby Plantation is the largest oil palm plantation globally
  • We are positive on the news
  • Downgrade to NEUTRAL with unchanged TP of RM9.05

Pursuing pure play strategy. Sime Darby Berhad (SIME) has announced its plan to demerge the current SIME into three pure plays. These will be Plantation, Property and Trading & Logistics. We gather that Plantation and Property division will be listed on Bursa Malaysia while Trading & Logistics will remain under the current Sime Darby Berhad. Justification for the move is that shareholders will benefit from the growth potential in each of the three entities as each division is now stronger, strategically structured and better equipped to stand alone and be listed as pure plays.

Sime Darby Plantation is the largest oil palm plantation globally. The division has total landbank of 988,599 ha out of which 603,254 ha is plantable. It is also the largest producer of Certified Sustainable Palm Oil (CSPO) with 2.6m MT of CSPO annually. The FFB growth prospect will be from its Indonesia operation in which 16% of its planted area of 203,300 ha are still immature (less than three years old).

We are positive on the news. We believe that the pure plays strategy will allow the management to focus on each division operation. As a result, this should unlock the value of SIME as conglomerate. We think that shareholders are likely to enjoy long term benefit from the removal of “conglomerate discount” attached by the market. This is especially true for the plantation division as pure planters tend to command higher PE valuation against conglomerates with many businesses.

Downgrade to NEUTRAL with unchanged TP of RM9.05. Our Target Price is based on Sum Of Parts (SOP) valuation. Since our Upgrade recommendation to BUY on 7-Dec-2016 when it was RM8.11, SIME share price has gained 8.8% to RM8.82. Hence, we think that most of the optimism on the corporate exercise has been priced in. Having said that, we think that the downside to share price is limited as SIME’s plantation division is expected to benefit from high CPO price. Dividend yield is also expected to be decent at 3.5% for FY17.

Source: MIDF Research - 27 Jan 2017

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