Investment Highlights

• Maintain HOLD on Sime Darby with a higher RNAV-based fair value of RM8.50/share. We have raised Sime Darby's FY18F net profit by 3.3% to account for a higher average CPO price assumption of RM2,700/tonne vs. RM2,550/tonne previously. Sime is currently trading at FY18F PE of 25.4x and FY19F PE of 23.9x.

• Sime's FY17 core net profit was within our forecast. Also, the group's full-year reported net profit of RM2.4bil met its KPI of RM2.2bil as estimated exceptional gains of RM675mil offset impairments of RM455mil. Included in Sime's 4QFY17 results were exceptional gains of about RM219mil compared with RM196mil in 1QFY17, RM58mil in 2QFY17 and RM202mil in 3QFY17.

• Sime took the opportunity of making impairments for various assets before the IPOs of its plantation and property units at the end of 2017F. The impairments consisted mainly of RM202mil for assets in Liberia and RM214mil for the distribution rights of Bucyrus mining equipment in Australia.

• Sime's share of earnings in the UK’s Battersea property project were RM140mil in FY17. Sime's share of the net profit in Battersea were RM87mil in 2QFY17, zero in 3QFY17 and RM53mil in 4QFY17. Earnings recognition from Battersea may resume in 2QFY18 when more properties are completed and delivered to the buyers.

• Average realised CPO price was RM2,813/tonne in 4QFY17 against RM3,088/tonne in 3QFY17. Average realised CPO price rose by 27.0% from RM2,242/tonne in FY16 to RM2,848/tonne in FY17. FFB production improved by 1.7% in FY17.

• In terms of core earnings, the property division was in the red in FY17. The unit recorded an EBIT of RM486mil in FY17, inclusive of exceptional gains of RM600mil. The property division was hit by provision for unsold stocks of RM149mil and expenses for termination of the Saizen REIT corporate exercise of RM23mil in FY17. On a positive note, the property unit swung into the black with a small EBIT of RM14mil in 4QFY17.

• EBIT of the industrial division slipped into a loss of RM7mil in FY17 from a positive RM338mil in FY16 due to the RM214mil impairment for the distribution rights of Bucyrus and RM43mil provision for contracts.

• Motor division performed well in FY17 underpinned by strong sales of BMW in Malaysia and China. Excluding a disposal gain of RM30mil, motor EBIT rose by 21.5% YoY to RM599mil in FY17.

Source: AmInvest Research - 28 Aug 2017