News  Sime Darby (SIME) has announced that it is selling its power business in Thailand for RM523m to B.Grimm. Note that B.Grimm is one of Thailand’s leading private power generation companies. The deal is expected to be completed before 30-Jun-2014.

 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 and property.

 We gather that the deal will see SIME’s exit from the power industry. Recall that in April-2014, SIME disposed its Malaysian power business to Malakoff Corporation for RM300m.

Comments  No detail on the gain from disposal was given by SIME. Hence, we assume no gain at this juncture pending clarification from management.

 Based on SIME’s power business 9M14 EBIT of RM132.8m, the selling price represents an estimated valuation of 3.9x Fwd. PE. Despite the seemingly low valuation, we believe that SIME has made the right decision to offload a non-core asset as the deal is expected to allow management to focus on its other core business.

 We believe that SIME is unlikely to distribute special dividend from the cash received from the deal. In our view, SIME might be looking to expand its plantation land bank as more than 70% of its Indonesia land bank has been planted. Coincidently, it was also reported by the media recently that SIME has joined in the race to acquire New Britain Palm Oil Ltd. (NBPOL), which owns a total of 104,900 ha of plantation land.

Outlook  Excluding this deal, SIME’s key earnings driver will still be CPO prices and FFB production. Although we are bullish on CPO prices, SIME’s FFB production is expected to decline 7% in FY14. Hence, the near term outlook is neutral.

Forecast  We maintain FY14E Core Net Profit (CNP) of RM3.06b. As mentioned previously, we assume no gain from disposal at this juncture pending clarification from management

 We also maintained our FY15E CNP of RM3.68b.

Rating Maintain MARKET PERFORM

 The deal should result in short-term positive sentiment for the stock. However, we believe the expected 7% FFB decline in FY14 is likely to keep SIME’s share price upside limited.

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