News  Sime Darby (SIME) has announced that it is taking a stake in Verdezyne Inc. (Verdezyne) which is a biotechnology company based in California, US. We gather that Verdezyne has proprietary technology to produce chemicals derived from sustainable materials, which can be found in the oil palm value chain. These include dodecanedioic acid (DDDA), sebacic acid and adipic acid. Currently, these chemicals are derived from petroleum-based feedstocks. (Refer Page 2 for Verdezyne process, products and its potential market).

 SIME plans to emerge as the single largest investor in Verdezyne. Other investors in Verdezyne include

BP Alternative Energy, Royal DSM (a global life science group), OVP Venture Partners and Monitor Ventures (both venture capital firm). SIME mentioned that Verdezyne has secured a strategic commercial relationship with Universal Fibre Systems (a global multi-polymer fiber producer) to supply bio-based adipic acid. Historically, Verdezyne began its operations in 2005 and has chosen Malaysia as its manufacturing hub and obtained BioNexus status in Sep-2013. Its first commercial plant has the capacity in excess of 13,000 MT.

 Justification for the deal is because SIME is taking measured steps to build and nurture a sustainable portfolio of palm-related industrial biotechnology companies.

Comments  We are neutral on the news as we believe that nearterm impact to earnings is minimal. Assuming a bluesky scenario of 80% utilization for the 13,000 MT commercial plant, production should only result in 10,400 MT of downstream product for SIME and this is very small at 0.4% of its 2.47m MT of CPO production in FY13. However, the longer term impact is positive as it should result in more demand for palm oil resulting from Verdezyne research.

Outlook  Excluding this deal, SIME’s key earnings driver will still be CPO prices which we are bullish on. We expect average CPO prices 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 high CPO prices currently.

Forecast  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 the 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 and lower-than expected earnings from non-plantation divisions.

Source: Kenanga