Weak start to the year - below expectations

SIME’s 1QFY17 core net profit of RM266m came in below expectations, mainly due to lower-than-expected contribution from plantation, industrial and property divisions. In view of the weak results, we cut our FY17-19E EPS by 7-28%. Maintain our SELL rating on SIME with a new TP at RM6.65 as we roll forward our valuation horizon to CY17 from FY17.

1QFY17 revenue was flat and net profit increased 47% yoy to RM474m

SIME’s 1QFY17 revenue was flat at RM10.1bn (-0.7% yoy) but net profit increased by 46.6% yoy to RM474m, as property and motor divisions profit mitigate lower contributions from plantation, industrial and logistics. 1QFY17 effective tax rate was also lower at 20.8% as compared to 23% in 1QFY16 due to gains on disposal of a subsidiary and interest in an associate in Indonesia, which are not subjected to tax.

Results below expectations

After excluding gain on disposals of investment property in HK, equity interest in Sime Darby Property (Alexandra) Pte Ltd and other one-off items, 1QFY17 core net profit increased by 29.1% yoy to RM266m. This came in below our expectations, accounting for only 10% and 12% of our previous and consensus FY17 forecasts, respectively. The variance to our forecast was mainly due to lower-than-expected contribution from plantation, industrial and property divisions. No dividend was declared by SIME for the quarter.

Cutting FY17-19 forecasts by 7-28%

Given the weak 1QFY17 results, we cut our FY17-19 core EPS forecasts by 7-28% mainly to account for lower profit contributions from plantation, industrial and property divisions. Our FY17-19 CPO production assumption is cut by 2-7% to 2.45m-2.76m MT, while CPO ASP assumption is maintained at RM2,400/MT for 2017-19E. Notably, management announced its FY17 Key Performance Indicator (KPI) target of a net profit of RM2.0bn and return on average shareholders’ equity of 6.4%.

Maintain SELL with a new TP of RM6.65

Our target price for SIME is now at RM6.65 (from RM6.74 previously), based on PER target of 19x to CY17E EPS as we roll forward our valuation horizon from FY17. We believe the stock is trading at an expensive level now. Maintain SELL on SIME.

Source: Affin Hwang Research - 28 Nov 2016