Investment Highlights

• We maintain our BUY recommendation on Sime Darby with a slight increase in its fair value to RM2.87/share (from RM2.86/share previously) after stripping out the profit contribution from the 3 Jining water ports and adding the disposal proceeds of its stake in Jining Port Companies to our SOP-based valuation (Exhibit 1).

• Sime Darby has announced that it is disposing of its entire 70% stake in Jining Port Companies, which consists of 3 river ports in Jining, China for a total cash consideration of RM181.6mil.

• There are 3 parts to the announcement:

1) We gather from the short analyst briefing yesterday that the total net book value of Jining Port Companies as at end-October 2020 was approximately RM172.0mil. However, after accounting for transaction costs, M&A costs and other expenses incurred, we understand that the net loss from the disposal is around RM8.0mil. We also note that the total net profit contribution of Sime Darby’s 70% stake in Jining Port Companies is approximately RM5.0mil annually to the group. This accounts for less than 1% of the group’s FY21F total earnings.

2) The total proceeds of RM181.6mil will be paid over a period of 3 years, where we understand that the first RM155.7mil will be paid up first via an escrow. The remaining RM25.9mil will be paid after 3 years. However, the payment schedule of the total sales proceeds was not disclosed.

3) Sime Darby will also subscribe to 49% in a new vehicle with Jining Port and Shipping Development Group Co Ltd (JPSDG), called Jining Port and Shipping Port Services Co Ltd (JPSPS), for RM123.5mil. JPSDG will hold the remaining 51% stake. Sime Darby will then progressively exit JPSPS over the next 3 years for RM132mil.

• We are stripping out Jining Port’s earnings contribution for the group’s FY21–23F earnings forecast, while adding in cash proceeds of RM155.7mil (1st payment from the sale of stake in Jining Port Companies) in the group’s net debt. The annual interest income from the cash proceeds (assuming 3% annually) will be approximately RM4.7mil per year, and this will be insignificant to Sime’s large earnings base.

• We are slightly positive on this development as Sime Darby is monetizing and divesting its non-core businesses and assets. We understand that the group is also looking to dispose its Weifang seaport – which has a net book value of RM963.0mil as at 30 June 2020. Maintain BUY on Sime Darby.

Source: AmInvest Research - 2 Dec 2020