Investment Highlights

• We maintain HOLD call on Sime Darby but trim our FV to RM2.42/share (from RM2.47/share).

• Sime Darby announced on Monday it will sell its entire interest in Weifang Sime Darby Water Management Co Ltd for RM275mil (RMB450mil or US$68mil) to Shandong Water Environmental Protection Group Co Ltd, which is a state-owned entity under the Shandong province.

• Weifang Sime Darby owns two water treatment plants, a water reservoir, a pump station and a 220km pipeline network covering two-thirds of the Binhai EconomicTechnological development area.

• Sime Darby guided that it would see a one-off gain of RM65mil from the sale (unit’s book value: RM214mil); resulting in a fair P/BV of 1.3x for the sale) and the gain would be retained by the group to pare down its debts or to be utilized for working capital.

• The deal is expected to be completed within the second half of 2018, so any impact on earnings would only be seen on the group’s 2HFY2019 (owing to the June year-end).

• Sime Darby did not state the rationale for the deal but we believe this has been in the group’s plans for a long time.

• While margins from the water unit have been comparatively better to Sime Darby’s other units, it has repeatedly asserted that this is not part of its core business. The water unit had a minor contribution to Sime Darby’s topline (about 0.2%) but a 3% impact on its PBIT.

• We also emphasize that the huge returns could have been pared down eventually seeing that water is perceived to be a necessity.

• Furthermore, Sime Darby’s focus moving forward should be its distribution businesses for which M&A seems to be the clearest path forward. The group’s capex for the shortterm will prioritize on acquiring BMW dealerships in China and adding service centres in Malaysia.

• Additionally, the group still has a number of non-core assets that were retained after the demerger from the plantation and property units.

• We adjust our earnings to reflect the removal of the water unit from 2HFY19. Likewise, our SOP-based FV is trimmed to RM2.42/share as a result of the change.

Source: AmInvest Research - 3 Jul 2018