Sime Darby’s (SIME) proposed listing of its plantation and property businesses is on track and expected to be completed by Nov/Dec 2017. After the demerger, SIME’s remaining core business will consists of motor, industrial, logistics and healthcare. There are plans for the new SIME to optimise its cost structure, expand its businesses and rationalise non-core businesses. No changes are made to our FY18-20E core EPS forecasts. We maintain our HOLD rating and SOTP derived 12-month target price of RM9.06.

On Track for Expected Listing by Dec 2017

To recap, SIME announced its plan to create three iconic stand-alone businesses, which consists of plantation, property and industrial, motors & logistics. The proposed listing of the plantation and property businesses is on track. The submission of application to the SC (Securities Commission) was done on 11 Sept 2017 and the draft prospectus for Sime Darby Plantation (SD Plantation) and Sime Darby Property (SD Property) is available on the SC website. Pending approval by authorities, which is likely to be in Oct/Nov 2017, and SIME’s EGM in Nov 2017, the listing of SD Plantation and SD Property is expected to be in Nov/Dec 2017.

The New Sime Darby Berhad

After the demerger, SIME’s main business will consists of the motors (long term partnership with key world class OEMS like BMW, Ford, Hyundai), industrial (long standing partnership with Caterpillar and Perkins), logistics (ports & logistics and water management in the province of Shandong, China) and healthcare (joint venture with Ramsay Healthcare) divisions. Future plans for SIME include: 1) Motor – focused on expansion in Asia Pacific with more aftersales and used car business, expand assembly capabilities and invest in new dealerships and acquire new dealerships; 2)

Industrial – drive operational efficiency to optimise costs, capitalise on strengthening demand for coal as well as public sector infrastructure works; 3) Logistics – targets to raise total port capacity to ~100m MT by 2020; and 4) Healthcare – to double amount of bed capacity from 1,541 beds currently, driving cost reduction and attaining operational excellence.

SD Property Snapshot and Highlights

SD Property has been in the property business for over 40 years and has a strong track record of developing landed to strata properties (residential, offices, retail and industrial developments). Currently, SD Property owns about 16,938 acres of land located mainly in the Klang Valley, Negeri Sembilan, Selangor and Johor. The total estimated remaining GDV (Gross Development Value) is RM101.1bn, with development horizon of up to 2040. Given the existing portfolio of lands are in different stages of maturity, this gives SD Property a more balanced development portfolio ranging from new township developments to integrated developments. SD Property is expected to benefit from opportunities in the strategic development of Malaysia Vision Valley (MVV). Meanwhile, their land bank within Negeri Sembilan and Johor are closely located to the High Speed Rail (HSR) project. Also, SD Property will have access to additional land bank of about 11,806 acres through the Land Option Agreements with SIME. SD Property will continuously review its portfolio to identify their key assets and to divest off non-core hospitality assets (such as Karri Valley Resort in Australia, Darby Park Serviced Residences in Margaret River Australia and Darby Park Serviced Residences in Vung Tau Vietnam).

SD Plantation Snapshot and Highlights

SD Plantation is a well-established globally integrated plantation company. The company is involved in: 1) the entire span of the palm oil value chain, from upstream to downstream activities, research and development (R&D), renewables and agribusiness; 2) rubber plantations; 3) sugarcane plantations; and 4) cattle rearing. SD Plantation is committed to good agriculture practices. Key targets are to achieve FFB yields of 25 MT/ha and oil extraction rate (OER) of 25% by 2025, higher downstream PBIT contribution of 20% within the next 5 years, average palm tree age profile of about 10 years (from 12.9 years currently) by 2025, innovative watering initiatives and integrated economics across the value chains. Replanting programmes will be on-going with high yielding materials used (Dami and Genome). The average replanting rate for Malaysia is at 5% while Indonesia is at 7%. The upstream division will also focus on cost reduction through mechanization (especially at the Indonesian estates), transformative restructuring and ongoing cost synergy initiatives. The downstream division will focus to become the preferred sustainable palm oil & fats specialist and customer solutions provider.

Maintain HOLD Rating With TP Unchanged at RM9.06

No changes are made to our FY18-20E core EPS forecasts. We maintain our SOTP derived 12-month target price on SIME at RM9.06, based on an unchanged 25x 2018E 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. We maintain a 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 deterioration in global economic outlook, and a significant decline in CPO and crude oil prices.

Source: Affin Hwang Research - 29 Sept 2017