Period  1Q14

Actual vs. Expectations Sime Darby (SIME)’s core net profit of RM505m is below expectation. Note that this makes up only 14% each of both the consensus full year estimate of RM3.51b and ours of RM3.53b. We have excluded forex loss of RM64m, gain of multiple disposals of RM44m and other non-cash item.

 We believe the main culprit behind the weak numbers is the weaker than expected FFB production, which declined 16% YoY to 2.47m mt in 1Q14 (against our expectation of 4% FFB growth). We have underestimated the severity of its plantation estates biological tree stress, which set in following the bumper harvest last year.

Dividends  As expected, no dividend was announced.

Key Results Highlights YoY, SIME’s core net profit tumbled 48% as CPO prices declined 14% to RM2331/mt and FFB volume slipped 16% YoY to 2.47m mt. Other non-plantation divisions also reported weaker YoY earnings.

 QoQ, SIME core net profit declined 53% to RM505m due to weaker performance from property (EBIT -78% to RM61m) and motor divisions (EBIT -48% to RM105m). Property division saw lower EBIT QoQ in the absence of industrial land sale while motor division was hit by weaker market sentiment in Singapore, Thailand and China.

Outlook  SIME has released its FY14 KPI of RM2.8b PATAMI assuming average CPO prices of RM2500/mt. Note that the KPI set is lower than FY13’s KPI of RM3.2b. However, we are not overly concerned on this as SIME usually outperformed its KPI.

Change to Forecasts FY14E’s core earning is reduced by 1% to RM3.50b after assuming lower FFB yield.

However, FY15E’s core earning is maintained at RM3.84b.

Rating Maintain MARKET PERFORM

 Despite the weak 1Q14 earnings, CPO prices have recovered recently to over RM2500/mt. This should bode well for SIME’s earning for the rest of FY14.

Valuation  We trim our Target Price to RM9.75 (from RM9.80) based on Sum Of Parts after assuming lower FFB yield for the plantation division.

Risks to Our Call Lower-than-expected CPO prices.

 Lower-than-expected earnings from non plantation divisions.

Source: Kenanga