News  Sime Darby (SIME) has announced that Weifang Sime Darby Port Co Ltd (WFSDP) has entered into a Shareholders’ Agreement with Weifang Port Co Ltd (WFP) and Shandong Hi-speed Transport & Logistics Investment Co Ltd (SHTLI) to establish a JV. The purpose of the JV is to construct, manage and maintain the sea channel, anchorage and other port infrastructure within the Weifang Central Port region.

 Note that WFSDP is a 99% owned indirect subsidiary of SIME. The JV structure will have total registered capital of RMB1.0b or RM536m with SIME contribution (through WFSDP) of RM203.7m resulting in SIME owning 37% in the JV (through WFSDP).

 Justification for the deal is because the JV is expected to accelerate the development of Weifang Port’s capabilities and improve its competitiveness. Recall that SIME owns a port operation business in Weifang (a city in Shandong Province, China).

 Comments   We are positive on the deal as we think it is in line with SIME’s long-term strategy to provide integrated water business and logistic park services in Shandong Province.

 In addition, its “Utilities China” operation under the Energy & Utilities division has performed well so far with its EBIT growing 98% YoY to RM25.3m in 1H14.

 However, the earnings contribution to SIME is still small at 1% of the Group’s EBIT.

Outlook  The news is positive to SIME long-term growth, but we think the impact to share price should be limited. SIME’s key earnings driver will still be CPO prices and we are bullish on it as we expect average CPO prices of RM2800/mt in CY2014 (+18% YoY against CY13 RM2371/mt). Hence, we believe that SIME 2H14 earning is likely to be higher than 1H14 due to high CPO prices currently at above RM2800/mt.

Forecast  We expect minimal earnings impact in the near-term for SIME. Hence, we maintain FY14E Core Net Profit (CNP) of RM3.49b. We also maintained our FY15E CNP of RM4.03b.

Rating Maintain OUTPERFORM

  We believe investors should start accumulating SIME as its 2H14 result should improve significantly due to current high CPO prices.

Valuation  Maintain our TP of RM10.00 based on Sum of Parts.

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

 Lower-than-expected earnings from non-plantation divisions. 

Source: Kenanga