Results

• 4QFY16 core net profit of RM911.3m (qoq: +534.2%; yoy: +50.5%) took FY16 core net profit to RM1.64bn (-15.8%). The results came in above expectations, exceeding consensus and our forecasts by 7.9-8.6%.

Deviation

• Higher-than-expected earnings at industrial and motor segments, which more than offset lower-than-expected property earnings.

Dividends

• -

Highlights

• Against the KPI s… Reported net profit and ROE of RM2.4bn and 7.6% surpassed KPIs of RM2bn and 6.3% respectively.

• QoQ… 4QFY16 core net profit increased by more than 5x to RM911.3m (from RM143.7m in 3QFY16), boosted mainly by higher earnings from plantation, industrial and motor earnings. Operating profit at plantation division expanded by more than 4x to RM523.9m, thanks to a 0.7% increase in FFB output, higher average CPO price realized (RM2,636/mt vs. RM2,200/mt in previous quarter), and improved midstream and downstream earnings.

• YTD… FY16 core net profit declined by 15.8% to RM1.64bn, mainly on higher CPO production cost (which has in turn dragged earnings at plantation division despite commendable earnings at midstream and downstream business), weaker earnings at industrial and energy divisions.

• Briefing highlights: (1) Proposed 5% private placement; (2) driving CPO production cost down amidst weak FFB output environment; (3) Sees better performance at industrial division in FY17; and (4) Aims to achieve RM3.5bn worth of new property launches in FY17.

Risks

• Sharp fall in FFB output and/or palm product prices;

• Prolonged weak demand for mining equipment; and

• Delay in property launches.

Forecasts

• Maintain for now, pending completion of private placement and exercise to establish a REIT platform.

Rating

HOLD

• Positives – Strong balance sheet.

• Negative – (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 SOP-derived TP of RM7.70 (see Figure 7) for now, pending a thorough review on the property segment (arising from its recent announcement to develop a REIT).

Source: Hong Leong Investment Bank Research - 24 Aug 2016