Results

• 1HFY16 core net profit of RM587m (-31.1% yoy) came in below expectation, accounting for only 27-29% of our and consensus full-year net profit forecast.

Deviation

• Weaker than expected performance across divisions except for motor and energy & utilities divisions.

Dividends

• Declared an interim single tier dividend of 6sen/share and this translates into dividend yield of 0.8%.

Highlights

• Its qoq decline in core net profit in 2QFY16 was mainly due to weaker performance in plantation and property divisions. Plantation division was hit by lower average CPO prices realised due to the US$50/tonne export levy in Indonesia and higher manuring costs and replanting cost.

• Expect better 2HFY16 performance. We are expecting better 2HFY16 especially 4QFY15, which is historically the strongest quarter for Sime. Better performance is likely to come from its plantation (on higher CPO prices and lower costs) and property (seasonally stronger in 2H). Besides, industrial division is likely to perform better on the back of more cont racts to be delivered, better demand for product support business as well as cost savings from previous restructuring activities.

• Target to bring down its gearing level to 0.54x from 0.65x. On top of the proposed RM3b perpetual sukuk programme, it also plans to raise about RM1.5b of net proceeds through its asset monetisation programme for its commercial and industrial assets in Singapore and Australia.

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 FY16-17 net profit forecasts downward by 3-17%, largely to account for weaker than expected performance across divisions as well as lower CPO price achieved YTD.

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: RM7.10) based on SOP.

Source: Hong Leong Investment Bank Research - 25 Feb 2016