Period  1Q15

Actual vs. Expectations Sime Darby (SIME)'s core net profit* (CNP) of RM518m is below expectations as it makes up only 16% of the consensus full-year estimate of RM3.14b and 17% of our forecast of RM3.09b.

 The key variance is the lower-than-expected CPO prices in 1Q15 at only RM2,187/MT (against our estimate of RM2,500/MT). This could be caused by a significant decline in soybean oil (SBO) prices to USD 32 cents/pound (vs. our assumptions of around USD 35 cents/pound). Note that SBO prices have been affected by bumper soybean crops coming from the US.

Dividends  As expected, no dividend was announced.

Key Results Highlights YoY, SIME’s 1Q15 CNP increased 2% to RM518m. Good earnings growth is seen in plantation division (EBIT +21% to RM307m) and motor division (EBIT +4% to RM109m). However, this is neutralised by lower profit from industrial division (EBIT -42% to RM187m).

 Plantation division EBIT benefited from increase in FFB production (+2% to 2.52m MT) and lower operating cost. These factors were more than enough to counter lower CPO prices (-6% to RM2,187/MT). However, industrial division was affected by weak demand for mining equipments from Australasia operations in line with persistently low coal prices.

 QoQ, 1Q15 CNP was down 50% to RM518m as plantation division EBIT slipped 54% to RM307m. We gather that plantation division has been affected by lower CPO prices (-12% to RM2187/MT) in which seasonally higher FFB volume of 2.52m MT (+11% QoQ) was not enough to cover the decline.

Outlook  SIME has released its KPI of RM2.5b PAT based on an assumption of the assumption of average CPO prices at RM2,350/MT. Management expects CPO price to trade between RM2,200 to RM2,500 per MT until Jun-2015.

 Motor division IPO is on track although the guidance is for a delay slightly to between July-2015 to Aug-2015 (from 1HCY15).

Change to Forecasts Our earnings forecast for both FY15E and FY16E are UNDER REVIEW with downside bias. The earnings cut for SIME is likely to be less severe than other pure planters as plantation division contributed only 46% of the Group’s EBIT in FY14. Our current estimate for both FY15E and FY16E CPO prices is RM2,500/MT.

Rating Maintain OUTPERFORM

 We are likely to maintain our OUTPERFORM call on SIME, although there will be a slight decline in our TP. We believe that the share price driver for SIME will be the news-flow resulting from its auto division IPO as its impact should exceed the corporate earnings’ impact.

Valuation  Our TP is UNDER REVIEW as our FY15E-FY16E EPS are UNDER REVIEW. Our last TP of RM10.10 is based on Sum-Of-Parts (SOP).

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

 Lower-than-expected earnings from non plantation divisions.

Source: Kenanga