Period  3Q14/9M14

Actual vs. Expectations  Sime Darby (SIME)'s core net profit* (CNP) of RM2.08b is below consensus expectation as it only makes up 66% of the consensus full-year estimate of RM3.17b. However, it is broadly within ours at 68% of our forecast of RM3.06b.

 We believe that the consensus may have overestimated SIME's FFB production (possibly a 2% decline) while it actually declined 12% YoY to 7.14m MT in 9M14.

Dividends  As expected, no dividend was announced.

Key Results Highlights YoY, SIME’s 9M14 CNP slipped 11% to RM2.08b as plantation division EBIT declined 22% to RM1.24b. This is caused by FFB volume decline of 12% to 7.14m MT, although it is cushioned by better CPO prices (+4% YoY to RM2439/MT). All non-plantation division earnings were also weaker YoY.

 QoQ, SIME’s 3Q14 CNP was down 7% to RM758m due to seasonally lower FFB volume (-18% to 2.10m MT) although the decline is cushioned by better CPO prices (+6% QoQ to RM2573/MT). All non-plantation division earnings were also weaker QoQ.

 However, some improvement was seen in 3Q14 YoY growth of 15% to RM758m. This is mainly due to better CPO prices, which have improved 20% to RM2573/MT. Note that the improved earnings in plantation division alone (EBIT +15% to RM472m) is more than enough to cover all non plantation division earnings which have declined YoY.

Outlook  Long-term outlook for SIME remains positive as we are positive on CPO prices over the horizon.

However, its near-term outlook may be affected due to an expected 7% decline in FFB volume for FY14. Management guided for 5% FFB volume decline but we prefer to be more conservative at this juncture.

Change to Forecasts We maintain our FY14E CNP of RM3.06b. We also maintained our FY15E CNP of RM3.68b.

Rating Maintain MARKET PERFORM

 We expect total return of 8.4% (5.3% upside and 3.1% dividend yield). Although SIME Fwd. PE of 15.5x is still lower than IOICORP’s 19.8x and KLK’s 19.9x, the stock is lacking near-term catalyst due to the expected 7% FFB volume decline for FY14.

Valuation  Maintain our Target Price of RM10.00 based on Sum Of Parts (Refer Page 2).

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

 Lower-than-expected earnings from non plantation divisions.

Source: Kenanga