Highlights

• According to The Edge Weekly, a proposal has been put forward for Sime to acquire Permodalan Nasional Bhd’s (PNB) stake in SP Setia as a first step towards consolidating the property portfolio of PNB.

• PNB has 51.1% in SP Setia, and a drect 10.1% stake in Sime, with another 36.7% held via Skim Amanah Saham Bumiputera. Apart from having a common major shareholder, both Sime and SP Setia have a 40% stake each in Battersea Power Station Development Co Ltd (which the remaining 20% stake is held by EPF).

• If the proposal comes to fruition, Sime would have to make an MGO for SP Setia, and the deal will likely be a cash deal (if it happens) as SP Setia’s minority shareholders may not like exchanging their shares for those in a conglomerate.

• This would in turn mean Sime could likely subscribe to a rights issue where PNB could subscribe for its entitlement by utilizing the proceeds from SP Setia.

Comments

• We are not surprised by this news; as such news has been around since last year.

• The addition of SP Setia into Sime’s stable (assuming at a price tag of 10% premium to SP Setia’s last traded price of RM3.35/share) will cost Sime RM9.4bn, if the deal turns out to be true.

• While we believe a merger between the two is possible, we are neutral on the deal (if it happens), as the deal will not boost Sime’s earnings significantly. Based on our estimates, the addition of SP Setia into Sime’s stable will boost the latter’s earnings by less than 5%. 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

SELL

Positives

• Strong balance sheet.

Negatives

• (1) Weak global economic outlook, coupled withthe 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 RM8.14.

Source: Hong Leong Investment Bank Research - 16 Mar 2015