- Sime Darby is selling a 9.9% stake comprising 110mil shares in Eastern & Oriental Bhd (E&O) to Morning Crest Sdn Bhd, a company owned by E&O’s MD Datuk Terry Tham Ka Hon for RM2.90/share or a total of RM319mil cash.

- The consideration represents a 21.8% premium over yesterday’s closing price of RM2.38/share. Sime Darby is expected to record a gain of RM56mil.

- Sime Darby’s stake in E&O will be reduced to ~22% (excluding treasury shares), for which it would continue to equity account E&O’s earnings, albeit at a lower rate, moving forward.

- The share sale agreement (SSA) is unconditional and is expected to be completed within two months, or upon the purchaser’s request, within three months, i.e. by 3Q14.

- The consideration was arrived at on a willing buyer-willing seller basis after taking into consideration the prevailing market price and its average cost of investment of ~RM2.27/share or a total of RM250mil. Sime Darby will use the proceeds for working capital.

- The shares were acquired between 2011 and 2013, and the carrying amount of the shares was ~RM263mil (or ~RM2.39/share) as at 30 June 2013.

- Sime Darby said the transaction would further align the interests of Tham and key senior personnel with that of E&O. It would make a ROI of ~28% on its average cost.

- This latest development comes amid speculation that Sime Darby’s major shareholder Permodalan Nasional Bhd (PNB) is looking at merging three of its biggest property companies – Sime Darby Property, S P Setia and Island & Peninsular Sdn Bhd.

- Despite its huge land bank, property accounted for only 11% of Sime Darby group’s EBIT in FY13 and only 7% for IHFY14. The group is targeting a PBIT of RM1bil by FY16 for the property division – mainly driven by the recognition of the Battersea project.

- We currently value Sime Darby’s property division at ~RM23bil – representing a 10% discount to the RNAV. The property segment makes up 31% of our SOP value for the group.

- Sime Darby currently faces external challenges in the industrial and motor divisions, while the palm oil division awaits growth to set in for its Liberia plantations.

Source: AmeSecurities