Results

• 2QFY17 core net profit of RM586m (qoq: +137%; yoy: +74%) took 1HFY17 core net profit to RM833m (+42%) The results came in below expectations, accounting for 36.3-37.2% of our and consensus full-year forecasts.

Deviation

• Weaker-than-expected earnings at property division.

Dividends

• Declared interim DPS of 6 sen (ex-date: 19 Apr 2017).

Highlights

• YoY… 2QFY17 core net profit increased by 74.4% to RM586m, boosted by higher plantation earnings (arising from higher palm product prices, higher FFB output in Indonesia and PNG, and improved performance at midstream & downstream segments), but partly offset by weaker contributions from industrial, motors and property divisions.
• QoQ… 2QFY17 core net profit more than doubled to RM586m (from RM247m in previous quarter), and this was boosted mainly by improved contributions from plantation, industrial, and motor divisions, but partly offset by weaker showing at the property division.
• YTD… 1HFY17 core net profit increased by 41.9% to RM1.09bn, and this was boosted mainly by the plantation and motor divisions, which more than mitigated weaker earnings from industrial and property divisions.
• Please refer to page 2 for more clarity on plantation & property business spin-offs.

Risks

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

Forecasts

• We lower our FY17-19 net profit forecasts by 5.9%, 3.7% and 0.6% respectively, largely to account for lower margin assumptions for the property division.

Rating

BUY ↔

• We are keeping to 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 earnings.

Valuation

• Maintain BUY recommendation and SOP-derived TP maintained at RM10.06 , as the downward adjustment in our FY17-19 earnings forecasts (arising from lower earnings assumption at the property division) does not affect our valuation for the property division (which we value based on RNAV).

Source: Hong Leong Investment Bank Research - 28 Feb 2017