Period

1Q16

Actual vs. Expectations

Sime Darby (SIME)'s 1Q16 core net profit* (CNP) of RM303m missed consensus (RM2.25b) and our forecast (RM2.30b).

Earnings were mainly dragged by weaker Plantation earnings due to lower CPO prices at RM2,088/metric ton (MT) compared to our expected RM2,200/MT. Industrial and Property segments also performed poorly due to low commodity prices and weak industry fundamentals.

Note that SIME has released their FY16 bottomline KPI at RM2.00b which is below consensus expectations (RM2.25b), implying further earnings downside ahead.

Dividends

No dividend announced, as expected.

Key Results Highlights

YoY, 1Q16 CNP dropped 42% as Industrial EBIT declined 71% as its Australasia-side made losses (RM4.8m) due to poor coal prices and recognition of provisions and impairments totalling RM23m. Property EBIT fell 28% as 1Q15 EBIT included contribution from the one-off sale of E&O at RM56m. Motors EBIT also declined 22% on weaker Malaysian demand as a result of tighter lending policies. However, the Plantation segment’s EBIT improved slightly (+2%) despite weaker CPO prices (-5%) due to higher FFB contribution post-NBPOL (+12% to 2.82m MT) and disposal gain from its Emery downstream assets (RM21m).

QoQ, 1Q15 CNP fell by two thirds on decline across the board. Property EBIT fell 72% as 4Q15 EBIT included contribution from the one-off sale of 50% stake in Sime Darby Sunsuria (RM157m). Plantation EBIT fell 37% due to weaker CPO prices (-7%) post-Indonesian levy, and weaker FFB production (-3%) due to severe drought in Kalimantan and Sulawesi. Industrial EBIT also fell 56% on weaker mining demand in China in addition to provisions as above.

Outlook

Plantation outlook is neutral on higher CPO prices expectation but weakening FFB growth outlook. Meanwhile, other segments are likely to experience headwinds. Further details overleaf.

Change to Forecasts

FY16-17E CNP lowered 16-8% to RM1.93-2.55b as we reduce FFB growth outlook as discussed above, and trim margins across all other divisions.

Rating

Downgrade to UNDERPERFORM (from MARKET PERFORM)

Management’s FY16 earnings KPI is premised on CPO prices at RM2,250/MT, which we think is still on the conservative side considering that 1HCY16 CPO prices could be trending much higher due to regional CPO production being hit by the lagged drought impact. However, we reckon this will be weighed down by weak sentiment on Industrials, Property and Motors earnings in the near-to-mid-term, both locally and globally. However, if there is a strong recovery in CPO prices to support SIME’s midterm earnings, we may consider upgrading our call.

Valuation

We reduce our TP to RM8.00 (from RM8.30) based on Sum-of- Parts after we: (i) downgrade earnings, (ii) roll forward to CY16E from FY16E, (iii) cut Motor’s target PER to 8.0x (from 10.0x) as we apply a 20% discount to average China motor company PER (10.0x) mainly due to local consumer headwinds, and (iv) updated Property’s target PER to 11.0x (from 12.0x), in line with current big-cap property valuation. Our TP implies 25.5x FY16E PER or +0.9SD valuation, even higher than our +0.5SD valuation for planters with above-average FFB growth outlook (6%).

Risks

Lower-than-expected CPO prices.

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

Source: Kenanga Research - 27 Nov 2015