Highlights

• The improvement in the industrial division’s earnings will be sustained beyond FY16 (albeit on a gradual manner), due to the full impact of leaner cost structure (arising from cost cutting measures) and current high coal price. While the jump in coal prices may not result in an immediate surge in demand for equipment sales in the Australasia region, we believe current high coal price would still translate to higher product support sales in the near term, as it makes sense for mining operators to step up mining output amid rising coal price environment.

• We believe there are still possibilities to further monetize/unlock its asset values, given the ongoing infrastructure projects which will benefit Sime given its vast landbank. Besides, the appointment of Tan Sri Abdul Wahid Omar as the new chairman of PNB could mean more asset unlocking/ restructuring exercises, in a move to energise the major shareholder’s investment portfolio.

• The recent private placement has raised gross proceeds of RM2.36bn to Sime’s coffers, hence reducing the group’s net debt and net gearing from RM12.3bn and 0.38x (as at 30 Jun 2016) to RM10bn and 0.29x.

Risks

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

• Delay in property launches on weak demand sentiment;

• Failure to further unlock assets.

Forecasts

• We raise our FY06/17 core net profit forecast by 9.4% to RM2.34bn, mainly to reflect earnings contribution assumption from Battersea phase 1 project. FY06/18 earnings forecast remains largely unchanged at RM2.58bn.

Rating

BUY ↑

• We are turning more positive on Sime’s prospects on several catalysts including: (1) Recent coal price recovery, which will have positive spillover effect on its industrial division; (2) Potentially more asset unlocking exercise, which would further crystalize Sime’s deep intrinsic value; and (3) Recent completion of private placement, which has strengthened Sime’s balance sheet.

Valuation

• We rationalize our valuation methodology for Sime Darby’s property division, roll forward our valuation base year (from FY17 to CY 2017), update Sime Darby’s latest audited holding company net debt and latest issued shares.

• Accordingly, our SOP-derived TP on Sime is raised by 16.9% to RM9.00. Our new TP has yet to reflect potential value to be crystalized from the injection of Sime’s industrial properties into Saizen REIT, and this could further bring our TP higher upon completion of the entire exercise.

Source: Hong Leong Investment Bank Research - 2 Nov 2016