Highlights

Sime Darby proposed to dispose its 75% stake in Port Dickson Power Bhd (PDP, an independent power producer, which operates a 440MW gas-fired open cycle power plant in Port Dickson) to Malakoff Power Bhd for RM300m cash.

The plant supplies electricity to TNB under a 21-year PPA expiring in Jan 2016.

In FY06/13, PDP recorded a PAT of RM77.3m and its net assets were RM221.5m.

The proceeds from the disposal will be utilized for working capital requirements of the group.

Comments

Assuming the disposal to complete by end-FY06/13, Sime Darby is expected to record a one-off gain of RM56.3m.

Minimal impact to earnings, as PDP’s earnings accounted for only 0.6% of Sime Darby’s FY06/13 earnings.

Positive, as: (1) It is in line with Sime Darby’s long term strategy to focus on its core businesses; and (2) PDP’s first generation PPA will be terminating in Jan 2016, and huge capex is required despite the new generation PPAs offer lower returns.

Earnings Forecasts

Maintained, pending completion of the disposal.

Risks

• Sharp fall in FFB output and/or palm product prices at the plantation division;
• Prolonged weak demand for mining equipment; and
• Delay in property launches.

Rating

HOLD
 

Positives – Strong balance sheet.

Negative – (1) Cooling economic activities in China and Australia may have an adverse impact on Sime Darby’s earnings; and (2) Overseas expansion risk.

Valuation

Maintain SOP-derived TP of RM10.02 (see Figure 1).

Source: Hong Leong Investment Bank Research - 8 Apr 2014