Highlights

• Sime Darby entered into a share sale agreement to dispose 126m and 48.8m units of E&O ordinary shares and warrants to Morning Crest (an entity owned by E&O’s MD Datuk Terry Tham) for a total consideration of RM342.2m (RM2.90/share and RM0.30/warrant).

• Post disposal, Sime Darby’s s take in E&O will be reduced to 12.1% (from 22.1% previously).

• To recap, Sime Darby acquired a 31.4% stake in E&O in Aug 2011 (consisting 60m ICULS and 278.1m shares at RM2.30 each). Subsequently, Sime Darby converted its 60m ICULS into equity and acquired another 15.9m E&O shares (in Jan 2012 and Jun-Jul 2013 respectively) and then pared down its stake in E&O to 22.1% in May 2014.

Comments

• Neut ral. The latest move is part of Sime Darby’s asset monetization exercise, which will generate cash proceeds of RM342.2m, and Sime Darby is expected to record RM46.9m disposal gain from the latest disposal (which we consider non-core).

Earnings Forecasts

• No change to our earnings forecast. We note that the latest announcement will not have signi ficant impact on Sime Darby’s earni ngs and balance sheet, as the disposal amount is small relative to Sime Darby’s asset size.

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.

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 unchanged target price of RM6.95 based on SOP.

Source: Hong Leong Investment Bank Research - 6 Jun 2016