- We maintain HOLD on Sime Darby, with an unchanged fair value of RM8.00/share, based on a 20% discount to an SOP value RM10.00/share.

- Sime Darby posted a core net profit of RM210mil (-75% QoQ, -52% YoY) for 1QFY16, accounting for only ~9% of our and consensus full-year forecasts. The net profit of RM328.4mil included gains of RM113mil on cross currency swap contracts. No dividend was declared.

- The lower performance stemmed from a lower realised average CPO price of RM2,088/tonne (-6.9% QoQ, -4.5% YoY) and deteriorating sales in all the other divisions.

- Management foresees CPO prices to be at RM2,250- RM2,450/tonne due to lower demand and high inventory levels in both Indonesia and Malaysia. It could possibly range RM2,400-RM2,600/tonne in 1H16, given the impact of El Nino on production.

- FFB production for 1QFY16 accounted for ~21% of our fullyear forecast. According to management, FY16 FFB production in Malaysia and Indonesia could decline 5%-6% and 8%-10% (overall -6% YoY), respectively, excluding NBPOL.

- Sime Darby expects the strong El Nino to last until April 2016. Including NBPOL, management said total FFB production could possibly be at ~11mil tonnes (-17% below our forecast).

- It has set an FY16 net profit target of RM2.0bil (-15% vs. our forecast) and a return on average shareholders’ equity target of 6.3% (-1.3ppts vs. our forecast). It is assuming an average CPO price of RM2,250/tones (-3% vs. our assumption of RM2,325/tonne).

- Sime Darby is undertaking a perpetual sukuk programme of up to RM3.0bil for the refinancing of debts and for working capital requirements.

- At yesterday’s briefing, management said a rights issue and/or monetisation of assets, including landbank, remain as options to pare down its gross gearing ratio from 60% currently to ~40%, and to brace for possible M&As.

- Management is still keen on listing the motors division, pending a more conducive market environment, while preparations for the spin-off have been made.

- Maintain HOLD, to wait out the current weak environment, as the risks bias to our projections remain on the downside.

Source: AmeSecurities Research - 27 Nov 2015