Highlights

Sime Darby has entered into a conditional share sale agreement to dispose 110m Eastern & Oriental (E&O) shares for RM319m (or RM2.90/share) to Datuk Terry Tham (the Managing Director of E&O).

Recall, Sime Darby first acquired a 31.4% stake in E&O (consisting 60m irredeemable convertible loan stocks and 278.1m shares at RM2.30 each) in Aug 2011. Subsequently, Sime Darby converted its 60m ICULS into equity and acquired another 15.9m shares in Jan 2012 and Jun-Jul 2013 respectively, bringing its total stake in E&O to 32% (or 354m shares).

Post transaction, Sime Darby’s stake in E&O will be reduced from 32% to 22%, and it will recognize a one-off gain of RM56m from the share sale.

The disposal will further align the interest of Datuk Terry Tham and the key personal of E&O, according to the announcement.

The transaction is expected to complete by 3Q CY2014.

Comments

Disposal gain aside (which we consider it non-core), we are Neutral on the latest development, as we believe Sime Darby could still leverage on E&O’s strong brand identity in the property sector, as it still holds 22% post share sale.

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

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 May 2014