News Sime Darby (SIME) has announced that it is selling its 75% stake in Port Dickson Power Berhad (PDP) for RM300m to Hypergantic Sdn. Bhd. (HPS) which is a wholly owned subsidiary of Malakoff. Note that PDP owns a “peaking plant” with 440 MW of capacity and HPS owns a 25% stake in PDP. The deal is expected to be completed in 2QCY14 or 4Q14 of SIME’s financial year.
SIME is expected to record a one-off gain of RM56m from this disposal.
Justification for the deal is because it is in line with SIME’s long-term strategy to focus on its core business of plantations, industrial equipment, motors, property and energy and utilities.
Comments Valuation-wise, the effective valuation of RM400m reflects 5.2x historical PE. Despite the seemingly low valuation, we believe that SIME has made the right decision to offload a non-core asset considering that PDP has less than two years left on its PPA. Additionally, the deal is expected to allow management to focus on its other core business.
Outlook Excluding this deal, SIME’s key earnings driver will still be CPO prices which we are bullish and expect an average price of RM2800/mt in CY2014 (+18% YoY against CY13 RM2371/mt). Hence, we believe that SIME’s 2H14 earning is likely to be higher than 1H14 due to the higher CPO prices currently.
Forecast FY14E net profit is increased by 2% to RM3.54b to reflect the RM56m one-off gain. However, we maintain FY14E Core Net Profit (CNP) of RM3.49b. We also maintained our FY15E CNP of RM4.03b.
Rating Maintain OUTPERFORM
The deal should result in short term positive sentiment for the stock. In the longer term, we believe investors should position for SIME 2H14 result which 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
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