Sime Darby has entered into conditional sales of its 30% stake in Tesco Malaysia for a net proceed of RM300m (net disposal gain of RM270m), which will be completed in 2H 2020. We are relatively positive on the announcement. We do not discount a potential special dividend distribution (4.4sen/share) from the disposal proceed. Maintain BUY recommendation on Sime Darby with unchanged TP: RM2.00, based on 20% discount to SOP: RM2.50.

NEWSBREAK

Sime Darby has entered into conditional agreement with C.P. Retail (Thailand) for the disposals of its 30% stake in Tesco Malaysia for a total proceed of RM300m (based on the enterprise value of Tesco Malaysia and adjusted for the net debt). The acquisition exercise is expected to be completed in 2H 2020.

The agreement is conditional to: 1) the approval of the Ministry of Domestic Trade and Consumer Affairs of Malaysia; and (2) the completion of the sale of Tesco Thailand to C.P. Retail.

HLIB’s VIEW

Positive. We are relatively positive on the disposal exercise, in line with Sime Darby’s long term strategy of disposing its non-core assets while expanding its core segments of industrial equipment and motor. The group is expected to record RM270m gain on disposal from the exercise (to be recognised in FY21). We do not discount the possibility of management to distribute the disposal proceed as special dividend (up to 4.4sen/share) in FY21.

Forecast. Unchanged. Note that Sime Darby has already written down its investment in Tesco Malaysia and does not equity account for Tesco Malaysia’s result.

Maintain BUY, TP: RM2.00. Maintain BUY recommendation on Sime Darby with unchanged TP of RM2.00, based on 20% discount to SOP of RM2.50. Despite the low net cash coverage holdings, we believe Sime Darby will be able to weather through the difficulties in CY2020, as the group has a strong balance sheet to access credit markets as well as strong support from major government linked shareholders. Sime Darby is also the best proxy for a global economy recovery in CY2021 with strong demand for industrial equipment from infrastructure stimulus plans (especially in China and South East Asia) and growth in Australia mining. We project sustainable dividend of 10 sen for FY20-22, translating into attractive dividend yield of 5.4%.

Source: Hong Leong Investment Bank Research - 23 Apr 2020