Period  2Q15/1H15

Actual vs. Expectations  Sime Darby (SIME)'s 1H15 core net profit* (CNP) of RM1.00b was below expectations, coming in at around 34% of consensus (RM2.93b) and our estimates (RM2.99b).  The main culprit was a weakened Industrial segment due to the global economic slowdown, which especially affected the Australian mining industry. Meanwhile, the Plantations segment declined as well due to lower CPO prices and weaker FFB production QoQ and YoY.

Dividends  Interim dividend of 6 sen was announced as expected making up 21% of our expected 28 sen full-year dividend. Note that SIME traditionally pays a larger final dividend during their 4Q.

Key Results Highlights  YoY, SIME’s 1H15 CNP fell 24% to RM1.00b with the weakest performer being the Industrial segment as the weak Australian mining sector resulted in lower Industrial segment’s margins (from 9% to 6%) and EBIT (-47% to RM310m).

 Plantations segment remained equally lacklustre in 1H15 with YoY CPO price declining 9% to RM2,172 and FFB production slipping 6% to 4.72m MT resulting in EBIT decline of 24% to RM583m.

 Property segment registered improved EBIT (+84% to RM232m) partly due to the sale of its 9.9% stake in Eastern & Oriental (E&O).

 Motors segment’s EBIT was slightly weaker (-5% to RM245m) due to poor consumer sentiment in China and Malaysia, offset by better demand in other regions.

 QoQ, 1Q15 CNP slipped 5% to RM489m on weaker Industrial EBIT (-34% to RM124m) as demand remained subdued. Property EBIT fell (- 38% to RM89m) due to one-off expenses for marketing of the Battersea Phase 3 project. Plantation’s EBIT softened (-10% to RM276m) on flat CPO prices (-2% to RM2,154/MT) and lower FFB production (-13% to RM2,194/MT).

Outlook  The ongoing commodities slump has significantly affected the mining industry in Australia, and we think this is likely to persist given the slowing economic growth in China. Hence, we expect the Industrial division to contract at least 9% YoY to RM905m from RM998m in FY14.

 We gather that the Motor division’s IPO is on track although the finalised IPO date is increasingly uncertain due to challenging market conditions. While we believe the Motor division’s IPO would be a positive catalyst for SIME, the delays attributed to market timing seem to imply unfavourable IPO valuations in the current environment.

Outlook  Management expects to complete its acquisition of New Britain Palm Oil Ltd (NBPOL) in Mar- 15. While we are long-term positive on the growth of SIME’s planted area while keeping to its ongoing moratorium on deforestation, overall earnings growth contribution should be relatively small at 1%-3% in FY15-16E.

Change to Forecasts  We reduce our FY15-16E CNP by 12%-9% to RM2.59b-RM2.91b as we cut our FY15-FY16E Industrial division’s EBIT estimate by 36%-30% to RM905m-RM1051m. We assume negative Industrial division revenue at -3%-0% (from 5%-5%) and narrower EBITDA margin at 9%- 10% (from 12%-12%). We have also incorporated the NBPOL acquisition into plantation earnings.

Rating Downgrade to MARKET PERFORM (from OUTPERFORM)  We downgrade our call to MP (from OP) as we expect depressed Industrial division’s earnings to continue, coupled with negative headwinds on the increasingly uncertain Motors division’s IPO, which was the main thesis of our earlier recommendation.

Valuation  We trim our TP to RM9.64 (from RM9.92) based on Sum-of-Parts after reducing our Industrial division’s earnings while our valuation basis remains unchanged. Our TP implies 21.1x CY15E core PER which is at the +1.0SD of its historical mean to reflect the potential spin-off of their Motor division while purer planters are at historical mean valuations.

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

 Higher-than-expected earnings from non-plantation divisions. 

Source: Kenanga