Results

• Missed expectations… 9MFY06/15 core net profit of RM1.3bn (-37.9%) missed expectations, accounted for only 44.7-51.6% of consensus and our full-year forecasts.

• Against its headline KPI target, the core net profit accounted for only 52.4% of its net profit target.

Deviation

• Lower-than-expected FFB output and average CPO selling price.

Highlights

• YTD… With the exception of the property and energy & utilities divisions, all other major divisions reported lower contributions and these include: (1) Lower average CPO price and FFB production, which dragged plantation division’s earnings lower by 44.8%; (2) GST implementation in Malaysia and stiff competition, which brought down the motor division’s operating profit by 18.4%; and (3) Persistent weak mining sector performance, which in turn resulted in lower equipment deliveries and product support sales at the industrial segment.

• QoQ… 3QFY06/15 core net profit improved by 5% to RM443m, and the improvement was driven mainly by stronger property earnings (which was in turn driven by higher earnings contribution from Elmina East and Taman Pasir Putih development projects, as well as higher contribution from the construction of Pagoh education hub).

• Will miss FY06/15 headline KPI target. Despite the qoq improvement and expectation of a better 4Q, management highlighted that it will miss its FY06/15 headline KPI target (RM2.5bn net profit) by 16-20% given the weak CPO prices and FFB production YTD, which dragged earnings at the plantation division significantly lower.

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

• FY06/15-17 net profit forecasts cut by 4-12.4%, largely to account for lower average CPO price assumption in FY06/15 (to reflect the average price achieved YTD) and lower EBIT margin assumption at the midstream and downstream plantation operations.

Rating

SELL

Negatives

• (1) Cooling economic activities in China and Australia may have an adverse impact on Sime Darby’s earnings; and (2) Overseas expansion risk.

Positives

• Strong balance sheet.

Valuation

• Post earnings revision, SOP-derived TP lowered by 6% to RM7.65. Despite the recent share price underperformance, we are maintaining our SELL rating on the stock given the absence of re-rating catalyst in the near-medium term.

Source: Hong Leong Investment Bank Research - 25 May 2015