Sime Darby (SIME) has proposed a de-merger to create 3 separately listed entities under its pure-play strategy. Shareholders of SD will receive 1 share each of Sime Darby Plantation (SDPL) and Sime Darby Property (SDPR) for each SIME share held under the proposed distribution exercise. SD will retain the trading, logistics and other businesses. Our RNAV-based fair value for SD post-exercise is RM14.7bn or RM2.16/share. We upgrade our call to BUY from Hold with adjusted RNAV-based TP of RM2.16, giving potential upside of 17%.

Pure-play Strategy

The de-merger will allow the three entities to focus on expanding their respective businesses, i.e, transportation and logistics for SIME, plantation for SDPL and property development and investment for SDPR. Post demerger, SIME’s distribution businesses for BMW cars and Caterpillar heavy equipment in the Asia-Pacific region will be the main earnings contributor. In addition, it operates Weifang and Jining Ports in China.

Residual Method for Reference Price

The reference price for SIME after the de-merger exercise is RM1.85, ie, based on the residual value after deducting the reference prices for SDPL at RM5.59 (based on FY17 PER of 28.7x) and SDPR at RM1.50 (based on Price/book of 1x) from the closing price of SIME of 8.94 on 24 November 2018. At reference price of RM1.85 for SIME, we estimate the implied FY18E PER of SIME post-exercise is undemanding at 15.5x.

Good Long-term Prospects

SIME’s long-term growth prospects as the exclusive distributor for BMW cars and Caterpillar mining and construction machines in the Asia-Pacific region are good, given its strong branding. But there are near term challenges such as exiting the BMW distribution operations in Vietnam and weak mining capex spending in the region which are affecting sales.

BUY With TP of RM2.16

We adjust EPS down by 70% in FY18-20E to reflect the impact of the exercise. Our RNAV-based TP for SIME post-exercise is RM2.16 (adjusted down from RM9.06 after excluding the plantation and property businesses). We upgrade our call to BUY from Hold. SIME declared a final DPS of RM0.17 for FY17 giving attractive net yield of 9.2% based on the reference price and exdate is 4 December. This note marks a transfer of coverage.

Source: Affin Hwang Research - 30 Nov 2017