Highlights 

Sime  surpris ed  the  market  by  announcing  its  intention  to make  a  general  offer  for  all  the  shares  in  NBPOL  at £7.15/share  cash.

Sime  has  already  secured  blessings  from  key  stakeholders including: (1) the PNG Government; and (2) NBPO L board, of which  the  independent  board  committee  intends  to unanimously recommend NBPOL shareholders to accept the general  offer.

The  acquisition  will boost Sime’s land bank by  15.6% to  1m ha and refining c apacity in Europe by 67% to 750,000 mt per annum.

Comments 

Pricing  wise…  The  price  tag  values  NBPOL  at  2014 -2015 P/E  of  16.4-20.5x  (based  on  consensus),  current  P/B  of 2.04x,  EV/ha  of  RM80,356  (planted  oil  palm  estates).  We believe the high price tag is justified given: (1) the scarcity of sizeable  brownfield  plantation  land  bank;  (2)  the  rare opportunity  to  acquire  quality  brownfield  asset  (which  has strong  reputation  and  track  record,  and  full  RSPO certification); (3) it is a good platform for Sime to expand into plantation  business in PNG.

Muted  earnings  impact  to  Sime…  Sime  would  not  have issue  funding  the  acquisition,  and  the  acquisition  will  only raise  Sime’s  net  gearing  from  0.22x  to  0.44x,  based  on  our estimates. Earnings wise, we estimate that the acquisition will add ~2.5% to Sime’s FY06/15  earnings, assuming: (1) Sime to acquire a 100% stake in NBPOL; (2) NBPOL to register  a net  profit  of  RM309m  (based  on  the  average  FY15 -16 consensus earnings);  and (3) interest rate assumption of 4% .

Earnings Forecasts

• Maintained  for now.

Risks 

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

Rating  HOLD

• Positive  –  Strong balance sheet.
• Negatives  –  (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 

• Maintain  SOP-derived  TP of  RM9.75

Source: Hong Leong Investment Bank Research - 10 Oct 2014