Investment Highlights

• Maintain HOLD on Sime Darby with an unchanged RNAV-based fair value of RM8.50/share. Ex-date for the spin-offs of Sime Darby (SD) Plantation and Sime Darby (SD) Property is 27 November 2017. SD Plantation and SD Property are expected to be listed at the end of November 2017.

• Based on a share price of RM9.05, the reference price for SD Plantation is expected to range from RM5.43/share to RM6.15/share while for SD Property is between RM1.45/share and RM1.72/share. The reference price of Sime Darby Bhd, which will only consists of motor, industrial and logistics operations after the spin-off of property and plantation, will range from RM1.18/share to RM2.17/share.

• Sime's annualised core net profit was below our forecast and consensus estimates. The discrepancies between Sime's results and our earnings forecast were due to weak downstream earnings, lower-than-expected EBIT margin in the motor segment and higher-than-estimated tax rate. In spite of this, we arekeeping our earnings forecast for now in anticipation of an earnings recovery in the rest of the financial quarters.

• Core plantation EBIT expanded by an estimated 55.9% YoY to RM513mil in 1QFY18 underpinned by higher CPO price and production. Core EBIT of the Indonesia division climbed from RM43mil in 1QFY17 to RM117mil in 1QFY18 while core EBIT of the Malaysia unit surged by 38.6% YoY to RM305mil. Average CPO price (group basis) rose by 3.9% from RM2,592/tonne in 1QFY17 to RM2,693/tonne in 1QFY18. Group FFB production improved by 25% YoY in 1QFY18. SD Plantation expects group FFB output growth to be 5% to 6% in FY18F.

• The downstream division achieved a smaller EBIT of RM70mil in 1QFY18 vs. RM74mil in 1QFY17. It posted weaker refining margins in Malaysia and Europe due to an increase in raw materials’ cost.

• The property division recorded a relatively flat core EBIT of RM36mil in 1QFY18 vs. RM35mil in 1QFY17. Property development revenue improved by 6.6% from RM398.1mil in 1QFY17 to RM424.3mil in 1QFY18. The number of property units sold were 667 in 1QFY18 vs. 435 in 1QFY17. Sime's share of earnings in the UK’s Battersea property project was RM87mil in 1QFY18 compared with a loss of RM1mil in 1QFY17. Sime started recognising Battersea's earnings from 2QFY17 onwards. The group's share of earnings in Battersea was RM140mil in FY17.

• Core EBIT of the motor division rose by 32.0% from RM101mil in 1QFY17 to RM132mil in 1QFY18 due to strong sales of BMW in Malaysia, China and Singapore. Core EBIT margin of the division was stable at 2.6% in 1QFY18 vs. 2.2% in 1QFY17.

• Core EBIT of the industrial division surged by 78.4% YoY to RM91.0mil in 1QFY18. The improvement in industrial earnings in 1QFY18 was driven by higher equipment deliveries and product support sales to the mining and construction sectors in Australia and China.

Source: AmInvest Research - 17 Nov 2017