Highlights

• Below are the key highlights from Sime’s early shareholders’ engagement on the listing of pure plays.

• Sime Darby Plantation to focus on organic growth with targets to:

• Improve FFB yield and OER (to 25 mt/ha and 25% by FY25 from 19 mt/ha and 21.3% in FY17) and bring down production cost at the upstream division, which would be achieved by maintaining its aggressive replanting activities (5-7% of planted land bank p.a. with higher yielding materials), improving on irrigation system and higher mechanization; and

• Increase PBIT contribution from downstream division (to 20% by FY25 from 5.2% in FY17), by focusing on differentiated, sustainable and traceable high value products and increasing its presence in key geographical markets.

• Sime Darby Property to focus on growing recurring income contribution (to 10% of its operating profits by FY22) by increasing its portfolio of income-generating assets (via JVs), developing its existing land bank along key growth areas and economic corridors , and expanding overseas property development footprint

(by leveraging on its involvement in Battersea Power Station).

• Sime Darby Bhd to focus on motor and industrial businesses which collectively accounted for 94% of its PBIT in FY17. It is worth noting that industrial division’s earnings visibility has improved, evidenced by the stabilizing metallurgical coal prices, which has in turn resulted in a sharp increase in order book (from RM1.5bn in Jun-17 to RM2.2bn in Aug-17).

• Dividend policy… Post exercise, Sime Darby Plantation and Sime Darby Property will have dividend policies of minimum 50% and 20% respectively. On the other hand, it is unclear if Sime Darby Bhd would maintain its current dividend policy of 50%.

Risks

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

• Prolonged weak demand for mining equipment; and

• Delay in property launches.

Forecasts

• Maintained for now, pending release of prospectuses and circular (expected by end-Oct/early-Nov).

Rating

BUY ↔

• We maintain our BUY recommendation on Sime, underpinned by its plan to spin-off the plantation and property businesses, which would further crystalize Sime’s deep intrinsic value.

Valuation

• Maintain BUY recommendation with unchanged SOPderived TP of RM9.96 (see Figure 1) for now, pending release of IPO prospectuses.

Source: Hong Leong Investment Bank Research - 29 Sept 2017