• We maintain our BUY recommendation on Sime Darby with an unchanged SOP-based FV of RM2.64/share, pegging an FY21F PE of 11x to its motor segment.

• Tesco PLC announced that it had agreed to sell its entire shareholdings in Tesco Malaysia to entities under CP Group of Thailand at an enterprise value of US$700mil which includes US$600mil of net debt. The net cash proceeds are expected to be approximately US$100mil.

• Sime Darby owns a 30% stake in Tesco Malaysia. We note that the group had earlier fully written down its investments in Tesco Malaysia. Hence any cash proceeds received from the disposal of its stake in Tesco Malaysia are expected to be a gain to the group. We will revise our forecast accordingly once we have better clarity on the group’s plans to utilize the proceeds.

• The disposal of its entire shareholdings in Tesco Malaysia is expected to be fully completed by 3QFY20 (Tesco PLC’s FYE is February, meaning by November 2020). Upon the completion of the deal, Tesco Malaysia will cease to be an associate company of Sime Darby.

• Based on the terms of the disposal, the net cash proceeds from the sale are expected to be approximately US$100mil. With a 30% stake, this will translate into a gain of circa US$30mil or RM126.3mil (based on current foreign exchange rates).

• We believe that the group has several options on the utilization of sales proceeds. These include: (i) paring down borrowings; (ii) keeping the cash proceeds; or (iii) distributing it as special dividends to shareholders.

• Based on our estimates, should the group chooses to pay out the disposal proceeds as special dividends, it would be approximately 1.85 sen/share if there is no significant movement in the exchange rate. This would sum up to FY21F dividends of 12.1 sen (our projection for FY21F dividend is 10.3 sen), translating into a dividend yield of 6.3%.

• On the other hand, if the group decides to pare down its borrowings, its net gearing ratio will be reduced slightly to 0.11x from 0.12x. Any interest savings moving forward will be marginal.

• The group has previously guided that it will continue to be challenging to dispose of its logistics assets comprising 4 city ports in Weifang and Jining in China due to political reasons. It will continue to try to monetize its non-core assets, i.e. Lockton Insurance and its 11.6% stake in E&O.

Source: AmInvest Research - 10 Mar 2020