Period

3Q15/9M15

Actual vs. Expectations

Sime Darby (SIME)'s 9M15 core net profit* (CNP) of RM1.20b fell short of both consensus (RM2.61b) and our (RM2.59b) estimates at approximately 46% of the full-year forecasts.

This was mainly due to a weaker-than-expected Plantation segment which saw EBIT declining 45% to RM685m on lower CPO prices (-11% to RM2,179/MT) and lower FFB production (-6% to 6.74m MT) due to weather disruptions.

Dividends

No dividend announced, as expected.

Key Results Highlights

YoY, 9M15 CNP dropped 42% to RM1.20b as Plantation segment EBIT slid 45% as outlined above. This was compounded by Industrial segment’s EBIT halving to RM389m as poor demand in the Australasia region persisted. On the positive side, Property segment’s EBIT doubled to RM562m partly due to the sale of its stake in Eastern & Oriental (RM55.5m), Subang Avenue (RM55.2m) and development land in Serenia City (RM64.4m). Meanwhile, Motors segment’s EBIT fell 18% on thinner margins (from 3% to 2%) due to weaker luxury automobile demand in Malaysia and China.

QoQ, 3Q15 CNP slumped 61% to RM193m on soft Plantation EBIT (-63% to RM102m) as poor weather disrupted FFB production (-8% to 2.02m MT). Industrial EBIT deteriorated further (-78% to RM78m) on waning mining demand, while Motors EBIT dropped 40% to RM81m, sharply hit by weak Malaysian demand ahead of GST implementation.

Outlook

Ongoing economic weakness and soft consumer sentiment are likely to depress Industrials and Motors earnings (see additional details overleaf).

Change to Forecasts

FY15-16E earnings slashed 30%-21% to RM1.80b- RM2.30b (see additional details overleaf).

Rating

Maintain MARKET PERFORM (from UNDER REVIEW)

We restore our MARKET PERFORM call from UNDER REVIEW. While we expect headwinds in SIME’s Industrial division to continue in the mid-term, we think the recent sharp share price correction indicates that the market has priced in much of the negative newsflow on the Motors IPO and soft Industrials segment.

Valuation

We cut our TP to RM8.71* (previous TP was RM9.64 prior to UNDER REVIEW) based on Sum-of-Parts. We roll forward our valuation base year to FY16, but our TP has been reduced because of lower expected earnings in the Plantation, Industrials and Motors segments. At our new TP, we expect a Total Return of 3.6% (Upside: -0.5%, dividend yield: 4.1%).

Our TP implies 21x FY16E core PER which is close to - 0.5SD historical average PER (previously +1.0SD). With the Motors division’s IPO issue finally put to rest, and in light of the soft outlook for most of its major operating segments, we believe the lower valuation basis for SIME is appropriate. Note that for most planters, valuations are pegged to average levels.

Risks to Our Call

Lower-than-expected CPO prices.

Below-expected earnings from non-plantation divisions.

Source: Kenanga Research - 25 May 2015