- We reaffirm our BUY recommendation on Sime Darby, with ourfair value raised to RM12.30/share (from RM11.80/share previously), pegging a10% discount to our revised sumof-parts value of RM13.70/share (vs.RM13.10/share previously).
- The higher SOP is the result of a stronger average CPO priceassumption of RM3,400/tonne (vs. RM3,300/tonne previously), in line with ourhouse CPO price.
- The RM100/tonne increase in our assumption has boosted SimeDarby's plantation EBIT for FY13F- FY14F by 6.4%-6.6% and net profits by 3.9%to 4.1% for the same period, translating into EPS of 77.0 sen-82.1 sen.
- CPO prices will continue to be robust, to be supported by positivedemand and slower supply growth.
- Sime Darby has guided for a rather flat FFB production growthof 3%-5%, in line with the expected flat production growth for Malaysian andIndonesian planters in FY12F.
- Oil palm trees could be facing stress after a bumper harvestin 2011 and there may be a lag impact from the drought which took place 2Q2010.
- On top of that, industry experts are expecting lower soybeanoil production in South America, whereby Oil World had recently forecastworld soybean output to decline 8.1% to 243 million tonnes in 2012F due toadverse weather in South America.
- There is further upside to our earnings estimate as we assumecosts of production of RM1,100/tonneRM1,200/tonne versus management's guidanceof RM1,000/tonne. Our sensitivity analysis indicates a 10% upside to ourplantation EBIT for FY13F-FY14F.
- While our BUY call mainly centres on its plantation business' (1) 60%-65% of its earnings coming from plantation division, and (2) SimeDarby is the most liquid proxy to the plantation sector with a sizeableweighting in the FBM KLCI of about 8.8% ' Sime's industrial division offers thestrongest EBIT growth of about 10% p.a., which could be attributed to therecent acquisition of Bucyrus.
- Sime Darby is attractive, being the cheapest amongst the biggerplantation stocks ' trading at CY13F PE of 12x ' vis-a-vis KL Kepong (16.5x CY13F) and IOICorp (13xCY13F). Likewise, Sime Darby istrading at a 27% discount to its conglomerate peers' average of 16.5x.