News StarBiz recommended that it is an opportune time for Sime Darby (“SIME”) to demerge its business.
The article reckoned that demerger should create better value for investors and highlighted two major demerger exercises last week involving IOICORP and UMW.
Comments We believe the next division slated for listing is property division due to its small EBIT contribution of RM420m or 8% to the Group in FY2012.
However, we think that the listing will only happen in FY2016.
In FY2016, property division earnings should improve significantly due to contribution from Battersea project and completion of Taman Melawati Shopping Mall (JV with CapitaMalls Asia).
Furthermore, SIME has set a 5-year target to double its property division EBIT to RM1.0b with 20% profit coming from overseas. We view this as a sign that the listing will only happen when the EBIT target is hit to allow sizeable IPO.
Our back-of-the-envelope suggests that property division IPO market cap should reach RM9.0b based on 12x PER, EBIT of RM1.0b and 25% effective tax rate. This assumption excludes interest cost.
Outlook The rumours of potential M&A may keep the stocks share price to be supported in the near term.
However, the company’s upcoming 3QFY13 result should be challenging in view of the current low CPO prices at an average of RM2324/mt (or a decline of 28% YoY). This should limit SIME’s share price upside.
Forecast There is no change to our FY13E-FY14E core net profits of RM3.05b-RM3.
Rating Maintain MARKET PERFORM
Valuation Maintaining our Target Price of RM9.80 based on the Sum-Of-Parts valuation model (Refer Page 2).
Risks Lower than expected CPO prices.
Source: Kenanga
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