SIME’s 9MFY17 core net profit of RM1.58bn (+64.2% yoy) came in below expectations. The variance was mainly due to a lower-thanexpected contribution from the property and industrial divisions. SIME’s proposed listing of its plantation and property businesses is on-track and is expected to be completed by end-2017. We are cutting our FY17-19 core EPS forecasts by 11-12% to account for the weak 9MFY17 results. As we still expect yoy growth in FY17-19 earnings, we raise our SOTP derived 12-month target price on SIME to RM9.03, after we roll forward our valuation basis to 2018. Maintain HOLD.

Lower Core Net Profit of RM632m in 3QFY17

Sequentially, Sime Darby’s (SIME) 3QFY17 revenue was higher marginally by 1% qoq to RM12.45bn, on a stronger contribution from the plantation, property, industrial and logistics segments, partially offset by a decline in contribution from motors. The EBITDA margin improved to 11.2% as compared to 11% in 2QFY17, mainly due to higher earnings from the plantation division given the better CPO ASP of RM3,088/MT in 3QFY17 from RM2,835/MT in 2QFY17. However, SIME’s core net profit, after excluding one-off items, declined by 16.1% qoq to RM632m.

9MFY17 Results Below Expectations

SIME’s 9MFY17 revenue and net profit increased by 8.2% and 40.4% yoy respectively to RM34.88bn and RM1.79bn. The increase in profit was mainly due to the higher contribution from the plantation (higher CPO ASP of RM2,861/MT vs RM2,113/MT in 9MFY16 but partially mitigated by weaker FFB production by 2.4%) and motors (higher contribution from Malaysia, China/HK and New Zealand as well as a gain on the disposal of an investment property in HK). Meanwhile, lower profit contributions were seen from industrial (due to lower engine deliveries to the O&G and marine sectors in Singapore), property (less construction work being completed and lower gains on the disposal of land, shares and Sime Darby Property [Alexandra]) and logistics (due to lower throughput at Jining ports but partially mitigated by higher water consumption and higher throughput in Weifang port). After excluding gains on disposals and other one-off items, the 9MFY17 core net profit increased by 64.2% yoy to RM1.58bn, which was below expectations, accounting for 66% of our previous FY17 forecast and 68% of the consensus forecast. The variance was due to a lower-thanexpected contribution from the property and industrial divisions.

Update on Proposed Listing of Plantation and Property Businesses

To recap, SIME has announced a plan to create three stand-alone businesses: plantation, property and trading & logistics. SIME has also proposed to undertake an internal restructuring of Sime Darby and its subsidiaries, involving the restructuring of the borrowings of the Group, the transferring of certain assets including land within the Group and the capitalisation of inter-company loans. Recently, SIME has received an approval from bondholders to restructure the US$800m Sukuk, and Sime Darby Plantation has received corporate ratings of Baa1 and BBB+ from Moody’s and Fitch Ratings, respectively, with a stable outlook. According to SIME, the proposed listing of the plantation and property businesses is on track and is expected to be completed by end-2017. The distribution of the prospectus is expected to be in November, followed by the listing in December.

Maintain HOLD Rating With New TP of RM9.03

We are cutting our FY17-19 core EPS forecasts by 11-12% to account for the weak 9MFY17 results, especially in the property and industrial divisions. As we still expect yoy growth in FY17-19 earnings, we raise our SOTP derived 12-month target price on SIME has to RM9.03 from RM8.61, after we roll forward our valuation basis to 2018. This is based on unchanged multiples of 25x our 2017E EPS for its plantation division, 14x for its property division, 24x for its industrial division, 10x for its motor distribution division and 10x for its logistics division. As there is 3% downside potential to our new TP, we maintain our HOLD rating on SIME.

Key Risks

Key upside risks to our HOLD rating include: (i) a significant recovery in global economic growth and/or favourable policies in its key markets boosting demand for core products and services; and (ii) lower-thanexpected production of vegetable oils and/or changes in regulations boosting CPO prices. Key downside risks include a deterioration in the global economic outlook, and a significant decline in CPO and crude oil prices.

Source: Affin Hwang Research - 1 Jun 2017