Results

1QFY06/14 core net profit of RM447m (qoq: -51.9%; yoy: - 54.9%) came in below expectations, accounted for only 12.8-13.8% of consensus and our full-year net profit forecasts.

Deviation

Weaker-than-expected performance at the property and motor segments.

Dividend

None.

Highlights

QoQ. Although revenue declining by a mere 9.1% to RM10.8bn, 1QFY06/14 core net profit declined by a whopping 54.9% to RM447m, mainly on the back of: (1) An 11% decline in CPO sales volume and lower profit at the mid-downstream operations, which dragged earnings at the plantation segment; (2) Lower sales of equipment and product support to the mining sector in Australia; (3) Weaker motor performance arising from continued weak demand sentiment in Singapore and Thailand, coupled with heavy discounting in China’s luxury car market (which had in turn resulted in lower profitability); and (4) Lower profit recognition from property development in Elmina East and Denai Alam, as well as the absence of lumpy industrial lots sales.

Briefing highlights – (1) Introduced FY06/14 KPI with net profit of RM2.8bn and ROASF of 10% (vs. FY13’s RM3.2bn and 12%), slightly lower than HLIB’s forecast which we believe is due to RM100 different in CPO price assumption; (2) Potentially list one of its Indonesian operations; and (3) Capex guidance reduced to RM4bn vs. RM6bn in FY13.

Risks

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

Forecasts

We trimmed our FY06/14-16 core net profit assumptions by 3.7-4.5%, largely to account for lower margin assumptions at the property development and motor segments.

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

Corresponding to a downward revision in our earnings forecasts, our SOP-derived TP on the stock was cut to RM8.45 (from RM8.73). Maintain Hold.

Source:Hong Leong Investment Bank Research - 2 Dec 2013