Period  4Q14/FY14

Actual vs. Expectations Sime Darby (SIME)'s core net profit* (CNP) of RM3.01b is within expectations; at 97% of consensus forecast (RM3.08b) and 98% of ours (RM3.06b).

Dividends  A final dividend of 30.0 sen was announced. Together with the 1st interim dividend of 6.0 sen, total FY14 dividend is 36.0 sen implying decent yield of 3.8%. This is higher than our earlier estimate of 29.0 sen as the actual payout ratio of 65% is higher than our earlier estimate of 55%.

Key Results Highlights YoY, SIME’s FY14 CNP was flat at RM3.01b as the impact of better CPO prices (+6% YoY to RM2451/MT) was neutralised by FFB volume decline of 7% to 9.42m MT. Note that plantation division is the biggest earnings contributor to SIME with 48% EBIT contribution.

 QoQ, SIME’s 4Q14 CNP increased 37% to RM1.04b as property division EBIT jumped 704% to RM358m due to profit recognition from the commencement of construction works at Pagoh Education Hub. However, things were slower at industrial division (EBIT -8% to RM199m) due to lower equipment deliveries and product support sales to the mining sector in Australia.

Outlook  SIME’s net income of RM3.35b is 20% ahead of its own KPI of RM2.80b. Looking ahead into FY15, we believe that its earnings growth prospect is neutral at +3% to RM3.09b.

 However, we think that the share price driver will be the potential spin off exercise within SIME business divisions which should allow SIME valuation to be rerated higher as it should emerge as pure planter. As it is, it has been reported by media quoting Tan Sri Mohd Bakke Salleh (SIME’s CEO) specifying that the listing of its motor unit is set to be executed in 1HCY15 subject to market conditions.

Change to Forecasts We maintain FY15E-FY16E CNP of RM3.09b-RM3.22b. However, FY15E-FY16E dividends are increased to 33.3 sen–34.7 sen after assuming higher payout ratio of 65% for both years (previously 55%).

Rating Maintain OUTPERFORM

 SIME’s Fwd. PE of 18.6x is still lower than IOICORP’s 20.9x and KLK’s 19.0x and we believe that the discount is due to its conglomerate status. Such discount should disappear in the longer run due to the reason stated above.

Valuation  Maintain our Target Price of RM10.10 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