Results 

9MFY06/12 core net profit of RM2,366m (-22.1%) came in within our expectation, accounting for 74.4% of our fullyear forecast. Against the consensus, the results came in below, at only 69.3% of consensus full-year estimates.

Deviations  -

Highlights

 YTD. Despite a fattish revenue growth (+1.6%), 9MFY06/13 core net profit declined by 22.1% to RM2.4bn mainly on: (1) Lower palm product prices (CPO: -18.8%; PK: -32.8%); (2) Lower property earnings on lower recognition from two mature townships (which are at tailend of development) and deferred launches in other townships; and (3) An 81.2% rise in net interest expense. Operating profit margin at the industrial division declined to 8.8% from 10.1% last year, as Sime was lowering prices of its equipment and parts and services in order to maintain its market position amidst the current challenging operating environment in the mining sector (that has resulted in its customers deferring capex plans). 

QoQ: 3QFY06/13 core net profit grew by 1% to RM691.2m as lower earnings at the upstream plantation division (which was in turn affected by seasonally weaker FFB output and lower realized palm product prices) were more than offset by RM45.1m gain on land disposal in Pagoh and higher profit recognition from property development in Bandar Bukit Raja and Denai Alam as well as improved performance by BMW in Hong Kong (which contributed to the motor division’s earnings growth).

Risks 

• Earlier-than-expected recovery in edible oil demand and prices; and
• Weather uncertainties revisit, which would have a positive impact edible oil prices.

Forecasts 

Maintained.

Rating

HOLD 

Positives – Strong balance sheet. 

Negative – (1) Weak global economic outlook, coupled with the impending excess supply of CPO will affect both demand and prices of CPO; (2) Cooling economic activities in China and Australia may have an adverse impact on Sime Darby’s earnings; and (3) Overseas expansion risk.

Valuation 

SOP-derived TP raised from RM8.45 to RM8.58 (see Figure 6) as we update Sime’s latest net debt position. Upgraded from Sell to HOLD as potential downside to our TP is now within HLIB’s house call of +/-10%.

Source: Hong Leong Investment Bank Research - 03 Jun 2013