Journey to Wealth
Sime Darby - More cautious stance on industrial and motors BUY
- We reaffirm our BUY rating on Sime Darby (Sime), with our fair value cut to RM11.20/share (from RM12.10/share previously), pegging a 10% discount to its revised estimated sum-of-parts value of RM12.40/share (RM13.40/share previously). The lower fair value is premised on a cut in earnings estimates for the industrial and motors divisions.
- Sime reported 1QFY13 earnings of RM990.3mill which came largely within expectations, covering 23% and 24% of our previous and consensus estimates for FY13F, respectively.
- Sime's earnings slid by 10% QoQ largely due to:- (1) weaker contributions from the plantation division as a result of lower CPO volume sold and weaker price realised at RM2,700/tonne (versus circa RM3,000/tonne in 4QFY12), and (2) a 33% drop in motor contribution resulting from tough operating environment in China.
- Weaker plantation numbers also contributed to a decrease in earnings YoY (-8%) on the back of weaker China demand and higher CPO price (RM2,946/tonne) realised last year.
- Sime's FFB production grew by 6%, whereby a 20% growth in Indonesia more than offset the 4% drop in production from its Malaysian trees.
- From its briefing, we gather that management has turned more cautious on the industrial and motor divisions. In fact, industrial order book again saw a decline in order book amid deferment in orders. Sime has decided to cut its capex (at least by 20%) for the division to RM1.1bil.
- Similarly, the Chinese markets would continue to be challenging in the subsequent quarters for the auto segment; although sales in Malaysia and other markets may slightly offset the shortfall in China sales.
- We cut our earnings by 7%-10% for FY13F-FY14F following our lower growth assumptions for both the industrial and motor divisions. We now assume a 3% (vs. 5% previously) revenue growth, while reducing its operating margin to 9% for the former and we cut motor's margin in China to 3.5%-4% with slower revenue growth of 15% vs. 20% previously.
- From a valuation standpoint, Sime is trading at an attractive CY13F PE of 14x, which is at a 20% discount to its 5 year historical average and conglomerate peers' 17x-18x. We expect the stock to trade within range in the near term due to weak sentiment, but demand recovery in CPO will provide impetus for better valuation.
Source: AmeSecurities
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
