Period  2Q14/1H14

Actual vs. Expectations Sime Darby (SIME)’s 1H14 core net profit (CNP) of RM1.32b is below expectations as it makes up only 40% of the consensus full year estimate (RM3.32b) and 36% of ours (RM3.65b).

 We believe the main culprit behind the weak numbers is the weaker-than-expected FFB production which had declined 14% YoY to 5.04m mt in 1H14 (against our expectation of positive FFB growth). We have underestimated the severity of its plantation estates biological tree stress, which set in after the prior bumper harvest.

Dividends  As expected, a net dividend of 6.0 sen was announced.

Key Results Highlights  YoY, SIME’s CNP declined 21% to RM1.32b as FFB volume slipped 14% YoY to 5.04m mt while CPO prices were lower by 2% YoY to RM2377/MT. Except property division, other nonplantation divisions also reported weaker YoY earnings.

 QoQ, SIME’s CNP improved 61% to RM814m due to sterling performance from plantation (EBIT +102% to RM514m) and motor divisions (EBIT +45% to RM152m). Note that CPO prices had improved 4% QoQ to RM2416/MT while FFB volume also increased seasonally by 4% to 2.57m MT.

Outlook  Despite the weak 1H14 result, we wish to highlight that the plantation division EBIT has doubled to RM514m QoQ due to improvement in CPO prices. With the current CPO prices at above RM2700/MT or at least 10% higher QoQ, we expect better days ahead for plantation division. Hence, the Group’s 2H14 CNP is likely to improve QoQ given that plantation is the biggest earnings contributor to SIME earnings.

Change to Forecasts FY14E CNP is reduced 4% to RM3.49b while FY15E CNP is trimmed 1% to RM4.03b. We have assumed lower FFB yield.

Rating Maintain OUTPERFORM

 We believe that investors should look beyond 1H14 weak result and start positioning for the expected better second half.

Valuation  We trim our Target Price to RM10.00 (from RM10.30) 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