News  SIME announced that it had entered into a 50:50 joint venture (JV) with Ramsay Health Care Limited (Ramsay). Please refer to the JV details on Page 2.

 We gather that SIME will inject three hospitals, a nursing and health sciences college and a wellness/lifestyle centre (all in Malaysia) into the JV. Meanwhile, Ramsay will inject its three hospitals in Indonesia into the JV. Ramsay will pay RM390m cash to SIME for its 25.7% stake in the JV (RM187m proceeds to be paid initially with the balance to be paid over the next three years).

 The JV will enable SIME to monetise its 50% investment in its healthcare division and recognise a net gain on disposal of RM340m.

Comments  Based on the estimated JV value of RM1.52b and its historical net income of RM19.6m, the deal effectively priced the JV at a 77.0x historical PER. This is higher than Ramsay’s historical PER of 27.0x and IHH’s historical PER of 31.0x. Despite the high premium, we believe the valuation is justified given the strong growth potential of the JV in Indonesia and its aspiration to expand its coverage in Asia through acquisitions and greenfield developments.

 Note that Indonesia’s Health Expenditure Per Capita* (HEPC) has grown at a strong 5-year CAGR of 23% to USD77 in 2010 (based on The World Bank data). Meanwhile, Malaysia’s HEPC has grown at 5-year CAGRof 11% to USD368 in 2010.

Outlook  Despite our positive view on the JV, we remain concerned on SIME’s plantation division earnings, which contributed RM3.2b or 54% of the group’s EBIT in FY12.

 Recall that SIME’s FY13 KPI of RM3.2b in net profit** is based on an average CPO price assumption of RM2700/mt. As CPO prices in 1QCY13 have been weak at an average of RM2322/mt, we believe that SIME should miss its FY13 net profit KPI above. Note that we are only expecting a FY13E core net profit of RM3.05b, which is in line with our assumption of an average CPO price of RM2500/mt for CY13E.

Forecast  We have raised our FY13E net profit forecast by 11% to RM3.43b after factoring in the one-off disposal gain of RM340m. However, we are maintaining our FY13EFY14E core net profits of RM3.05b-RM3.55b as the estimated interest earned from the RM187m cash received is less than RM10m or just 0.3% of FY13E core net profit.

Rating    Maintain UNDERPERFORM

Valuation  We are maintaining our Target Price of RM8.82 based on a Sum-Of-Parts valuation (refer Page 4).

Risks  Better than expected CPO prices.

Source: Kenanga