Period

4Q15/FY15

Actual vs. Expectations

Sime Darby (SIME)'s FY15 core net profit* (CNP) of RM2.08b was within consensus (RM1.98b/105%) and above our forecast (RM1.80b/116%).

This was mainly due to a sharp rebound in Plantation earnings in 4Q15 with a substantial 43% jump QoQ in FFB production to 2.90m MT after including production in its New Britain Palm Oil Ltd. (NBPOL) subsidiary.

Dividends

A 19.0 sen dividend was announced, bringing FY15 DPS to 25.0 sen, topping our 19.4 sen forecast by 29%.

Key Results Highlights

YoY, FY15 CNP dropped 33% with Plantation segment’s EBIT falling 38% as flat FFB growth (+2% to 9.64m MT) failed to offset weaker CPO prices (-11% to RM2,193/MT). Industrial segment EBIT also halved to RM512m as low coal prices reduced demand, particularly hitting Australasia. Property segment’s EBIT jumped 76%, partly on one-off disposals amounting to some RM270m. Motor’s EBIT also weakened 26% on thinner margins (from 4% to 3%) on weaker automobile demand in Malaysia and China.

QoQ, 4Q15 CNP more than tripled on inclusion of NBPOL earnings in Plantation, as noted above. Motor’s earnings improved 74% on better performance in Australia and sales improvement post-GST in Malaysia. Industrial’s EBIT recovered 59% on higher product support sales for mining in Australia among others. Property’s EBIT rose 11% partly on the disposal of its Sunsuria interest during the quarter.

Outlook

Plantations outlook is neutral as weaker CPO prices will depress near-term earnings, compounded by belowaverage FFB growth at 3% (against sector average of about 7%). We think CPO prices may not improve until late-2015.

Property and Motor’s outlook is challenging given the weak consumer confidence in Malaysia and China, while Industrial segment is expected to remain soft on China's economic slowdown.

Change to Forecasts

No change to our FY16E CNP of RM2.30b as we introduce our FY17E CNP of RM2.77b.

Rating

Maintain MARKET PERFORM

We maintain our MARKET PERFORM call on SIME despite the neutral-to-weak overall outlook as we think the recent share price correction indicates that the market has priced in much of the weak macro sentiment, especially from China and Australia.

Valuation

We reduce our TP to RM8.30 (from RM9.04) based on Sum-of-Parts. We have lowered our TP as we update our Property segment’s valuation to 12.0x (from 15.0x) post the sector derating in recent weeks. We also slash our Industrial segment’s valuation to 8.0x (from 15.0x) to reflect a 50% discount to Caterpillar's Fwd. PER of 15.7x. We apply a 50% discount to reflect the weak economic fundamentals in SIME's Industrial operations in China and Australia.

Our TP implies 21.8x FY16E Core PER which is close to - 0.5x historical average PER, and we believe this is appropriate in light of the weak short-mid-term outlook in most of its major business segments.

Risks to Our Call

Lower-than-expected CPO prices.

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

Source: Kenanga Research - 27 Aug 2015