- We reiterate our BUY call for Sime Darby, with an unchanged fair value of RM11.20/share – a 10% discount to our SOP value of RM12.45/share.

- The group is pursuing an IPO of its automobile business, which may raise ~US$500mil, Wall Street Journal (WSJ) reported last Friday. Citing sources, WSJ said the planned IPO of Sime Darby Motors is slated for this year.

- WSJ reported that Sime Darby had last Thursday invited banks to pitch for the mandate, and they are required to submit their pitch by the end of this week.

- In response to the report, Sime Darby said a stock market listing is just one of the many potential exercises that the company will consider towards enhancing shareholder value.

- Sime Darby operates its automotive business under Sime Darby Motors, which is involved in the sales, distribution and assembly of cars. It represents 31 marques in Malaysia, Singapore, China, Hong Kong, Thailand, Macau, Australia, and New Zealand.

- Apart from Malaysia, it also has operations in countries such as Australia, China, Hong Kong, Singapore, and Thailand. It sells over 80,000 vehicles annually.

- We are not surprised by this latest development as Sime Darby’s automotive division has grown significantly over the last few years. It is now the group’s third largest earnings contributor, having overtaken the property division four years ago.

- The division’s revenue and EBIT grew by annual rates of 17% and 32%, respectively, between FY09 and FY13. We expect revenue CAGR of 7.8% for FY14F-FY16F, breaching the RM20bil-mark by FY16F, and EBIT CAGR at 8.5% for the same period.

- Based on our SOP derivation, the auto division at RM6.4bil (premised on an average auto PE of 11x its CY14 earnings) now accounts for ~9% of the group’s RNAV of ~RM75bil.

- It accounted for ~15.5% of group EBIT in FY13. That could fall to ~15% in FY14 amid pricing pressure in the Asia Pacific region, ex-Malaysia.

- Notwithstanding the short- and medium-term challenges, Sime Darby continues to be a prime beneficiary of any upward trend in CPO prices as well as of an economic pickup in the Asia-Pacific region.

- We maintain our numbers and our BUY call.

Source: AmeSecurities