Sime Darby is disposing its 100% stake in Weifang Water (WSDF) for cash consideration US$68.0m (RM275m), which will be completed in 2HCY18. Sime Darby is expected to achieve a gain on disposal of RM65m (1 sen/share). We are neutral on the disposal exercise, given its immaterial contribution to Sime Darby’s earnings. Maintain SELL recommendation with unchanged TP: RM2.15 due to its steep valuation.

NEWSBREAK

Sime Darby has entered into a share purchase agreement with Shandong Water Environmental Protection Group (Shuifa) to divest its 100% equity interest in Weifang Sime Darby Water Management (WSDW) for a total cash consideration of US$68.0m (RM275m). The proposed divestment is expected to be completed by 2HCY18.

About WSDW. WSDW owns and operates two water treatment plants with a total capacity of 140,000 m3/day, a water reservoir with total capacity of 3.5m m3, a pump station and a 220km pipeline network covering two-thirds of the Binhai Economi Technological Development Area.

Gain of RM65m. Sime Darby is expected to record a one-off estimated net gain of RM65m (1 sen/share) from the exercise. The proceeds from the exercise will be utilized to pare down borrowings and/or to fund the group’s operations.

HLIB’s VIEW

Neutral on the sale. We are overall neutral on the proposed disposal exercise, as the asset only contributed c.RM20m or 1.7% of the group’s PBIT. The exercise is part of Sime Darby’s overall restructuring plan to re-align its focus on Industrial and Motor segments and divest non-core assets (including ports and water assets).

Forecast. Unchanged.

Maintain SELL, TP: RM2.15. Maintain SELL recommendation with unchanged SOP derived TP: RM2.15. We believe Sime Darby’s share price has run ahead of its fundamental value. Valuation is relatively steep at this juncture with unattractive dividend yield.

Source: Hong Leong Investment Bank Research - 3 Jul 2018