Results

• Weaker-than-expected… 1Q15 core net profit of RM492.2m (qoq: - 52.2%; yoy: +10.1%) came in below expectations, accounted for only 14.8 -15.7% of our and consensus full-year net profit forecast.

Deviation

• Weaker-than -expected performanc e at the plantation and industrial divisions.

Highlights

YoY… 1QFY06/15 core net profit declined marginally by 0.4% to RM445.2m, as performance improvement at the plantation and property divisions was offset by weak er earnings contribution from the industrial division.

Briefing highlights – (1) Introduced FY06/15 KPIs, with target net profit of RM2.5bn and ROASF of 8.5%; (2) No light at end of tunnel for the industrial division yet; (3) The completion of NBPOL acquisition will be del ayed by a month to Jan-2015.

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.

Forecasts

• We cut our FY06/15-17 net profit forecasts by 16-19.1%, largely to account for: (1) Slightly higher CPO production cost and lower margin assumption at the mid-downstream plantation divisions; (2) Lower revenue and EBIT margin assumptions at the industrial division (on lower equipment deliveries and product support sales to the mining sector in Australia).

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

• Our SOP-derived TP on the stock was lowered by 9.6% to RM8.59 following: (1) downward revision in our net profit forecasts; and (2) update in Sime’s holding company net debt level. Maintain HOLD recommendation on the stock.

Source: Hong Leong Investment Bank Research - 1 Dec 2014