Highlights

• Sime Darby announced its plan to spin off its plantation and property segments in separate listings on the local stock exchange, while retaining its trading and logistic segments (which include auto, industrial, logistic and healthcare businesses) under Sime Darby (the existing listing vehicle). Each business will bear the Sime Darby brand name.
• Details on the planned spin-offs remain sketchy (in particularly, timing and values) at this juncture.

Comments

• We are positive on the latest development, as the planned spin-offs allow Sime to crystalise values of its businesses. Besides, the spin-offs allow each business to take advantage of potential growth and opportunities.
• Based on our sum-of-parts valuation methodology, we value Sime?s: (1) Plantation business at RM35bn (based on 20x CY2018 net profit and EV of RM60,885/ha for its total planted landbank of 603,254ha); and (2) Property business at RM19.8bn (based on RNAV for its existing landbank, RM1.55/share and RM0.18/warrant for its remaining 10% stake in E&O).

Risks

• Sharp fall in FFB output and/or palm product prices;
• Prolonged weak demand for mining equipment; and
• Delay in property launches.

Forecasts

• Maintained, pending completion of exercise.

Rating

BUY ↔

• We keep our BUY recommendation on Sime, underpinned by: (1) Its plan to spin-off the plantation and property businesses, which would further crystalize Sime?s deep intrinsic value; (2) Recent completion of private placement, which has strengthened Sime?s balance sheet; and (3) Our anticipation of better quarters ahead on the back of better plantation and property earnings.

Valuation

• Maintain BUY with higher SOP-derived TP of RM10.06 as we remove our 10% holding company discount on Sime (we believe the spin-offs will unlock values of its businesses).

Source: Hong Leong Investment Bank Research - 27 Jan 2017