Highlights

According to Bloomberg, Sime Darby will invest US$30m into Verdezyne Inc, an industrial biotechnology company based in California, USA, to develop a facility that will convert palm oil waste into industrial chemicals.

Verdezyne has proprietary technologies to competitively produce chemicals derived from sustainable materials that can be found in the oil palm value chain, which could in turn substitute petroleum-based feedstocks (such as benzene and butadiene) in making everyday items as well as industrial products. Verdezyne’s current products targeted for commercialization have a potential combined market size of ~RM37bn with laboratory, pilot and demonstration-scale validation already carried out.

Verdezyne’s current investors include BP Alternative Energy Ventures, DSM Venturing B.V., OVP Venture Partners and Monitor Ventures. In Sep 2013, Verdezyne was awarded “BioNexus” status (which is awarded to qualified companies undertaking value-added biotechnology and/or life sciences activities in Malaysia, and includes fiscal incentives, grants and other form of guarantees) by Malaysian Biotechnology Corporation.

Comment

Neutral. The latest announcement will not have significant impact to Sime Darby’s earnings and balance sheet, as the investment amount is small relative to Sime Darby’s asset size.

Nevertheless, it would help Sime Darby in strengthening its position in the oil palm plantations downstream segment, should the development succeed in converting palm oil waste into industrial chemicals.

Earnings Forecasts

Maintained.

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 - 29 Apr 2014