Results

• 1QFY06/16 core net profit of RM362.3m (-50.6% qoq, -18.6% yoy) came in below expectations, accounted for only 16% of our and consensus full -year net profit forecast.

Deviation

• Weaker-than-expected performance across divisions.

Dividends

• -

Highlights

• Sharp qoq decline in core net profit in 1QFY06/15 was mainly due to weaker performance across divisions while its yoy decline was dragged by weaker than expected contribution from plantation, industrial and motor divisions offsetting the better contribution from property segment.

• Introduced FY06/16 KPI. Sime has established its KPI targets for FY06/16 with a net profit of RM2.0b, lower than FY06/15 net profit of RM2.3b. The KPI targets are based on CPO price assumption of RM2,250/tonne (our CPO price assumption is RM2,300/tonne).

• FY06/16 would be a challenging year for SIME with difficult business condition in its key operating markets. Plantation division is likely to be supported by the full year contribution from New Britain Palm Oil (NBPOL), mitigating the slowdown in production in Malaysia and Indonesia due to the lagged impact from dry weather. On the other hand, its other divisions are likely to be affected by the slowdown in the Malaysian and China economies, weak market sentiment and weaker Ringgit.

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 revise our FY06/16-17 net profit forecasts downward by 8-12%, largely to account for weaker than expected performance in industrial and motor divisions as well as lower FFB production growth.

Rating

HOLD

Positives

• Strong balance sheet.

Negatives

• (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 HOLD with lower target price of RM7.00 (previous TP: RM7.03) based on SOP.

Source: Hong Leong Investment Bank Research - 27 Nov 2015