We believe the YTD 6% decline in its share price to below RM9.00 recently has presented investors with an opportunity to accumulate SIME at attractive valuation levels. Even though CPO prices have improved significantly YoY and are currently trading at above RM2,500/mt (against RM2,221/mt in Jan-2013), SIME is surprisingly being traded lower than the Jan-2013 range of RM9.22-RM9.71. Additionally, we expect 2Q14 earnings to improve QoQ due to better CPO prices and higher FFB production. Overall, we expect healthy FY14 earnings growth of 5% as earnings recovery in plantation division should more than offset the weaker non-plantation division. We maintain our FY14E and FY15E core earnings at RM3.65b and RM4.05b, respectively. Reiterate OUTPERFORM on SIME with Target Price of RM10.30 based on Sum-Of-Parts valuation with plantation division valued at 18.7x Fwd. PER.

Attractive valuation. We believe that the share price decline of 6% YTD to below RM9.00 recently has presented investors with an opportunity to invest in SIME at attractive valuation levels. Even though CPO prices have improved significantly YoY and are currently trading at above RM2,500/mt (against RM2,221/mt in Jan-2013), SIME is surprisingly trading lower than the Jan-2013 range of RM9.22-RM9.71. Valuation-wise, SIME is currently trading at only 13.4x Fwd. PE or 9% below its 5-year average level of 14.8x.

Expect 2Q14 earnings to improve QoQ on better CPO prices and higher FFB production. We gather that CPO prices have improved 7% QoQ to RM2,511/mt in 2QFY14 (against 1QFY14’s RM2,345/mt) according to MPOB publication. Additionally, FFB production has increased 4% QoQ to 2.57m mt in 2Q14 (from 2.47m mt in 1Q14). As the plantation division is the biggest earnings contributor to SIME, we believe this should translate into better earnings for SIME (2Q14 results to be announced at the end of February).

Good earnings recovery in plantation division should more than offset the weaker non-plantation division. We believe that the prospect for the plantation division should improve significantly in FY14 as we expect SIME to realize average CPO prices of RM2,583/mt (or 11% higher than FY2013 level of RM2,317/mt). This is mainly due to our bullish view on CPO prices in which we expect average CPO prices of RM2,800/mt in CY2014 due to strong biodiesel demand from Indonesia and expected lower inventory in Malaysia by end-2014. Overall, better earnings from the plantation division should more than enough to cover weaker earnings from non-plantation divisions such as industrial and motor.

Maintain OUTPERFORM with unchanged Target Price of RM10.30. We maintain our FY14E and FY15E core earnings at RM3.65b at RM4.05b, respectively. Our valuation of RM10.30 is also maintained based on Sum-Of-Parts in which the plantation division is valued at 18.7x Fwd. PER which is in line with big cap planters’ valuation. At current share price, we expect total return of 18.7% (15.0% upside and 3.7% dividend yield).

Source: Kenanga