News

Sime Darby Berhad (SIME) announced that they have successfully made their first issuance of RM2.2b SukukWakalah (Sukuk) under its Perpetual Subordinated Sukuk Programme (Sukuk Programme) of up to RM3.0b. The Sukuk has been issued with a tenure of perpetual non-call 10 years at a profit rate of 5.65% yearly.

We gather that the proceeds of the Sukuk issuance will be largely used for refinancing SIME’s debt obligations.

Comments

We are overall neutral on the issuanceas the gearing reduction is offset by lower expected CNP.

On the one hand, we expect the Sukuk program to reduce FY16-17E net gearing from 0.35- 0.33x to 0.28-0.26x.

Nonetheless, as the Sukuk yield of 5.65% is higher than SIME’s 5-year average net interest rate of 4.06%, the net impact on CNP is negative.

Outlook

Although plantation performance should improve in 3Q16 on better CPO prices (quarterto- date 2Q16: RM2,332/MT or +9.6% vs 1Q16), this may be offset by a softer post-drought production outlook.

Non-plantation segments’ outlook is largely weak due to poor consumer sentiment (Property & Motor) and soft coal prices (Industrial).

Forecast

We lower our FY16-17E CNP by 4-2% to RM1.54-2.05b after imputing net negative impact of the perpetual sukuk profit requirements and reduction in other borrowings interest cost.

Rating

Maintain UNDERPERFORM Better near-term Plantation’s prospect is overshadowed by soft Property, Motors and Industrial outlook.

Valuation

No change to our TP of RM7.15 based on Sumof- Parts. Our Plantation segment PER at 24.0x is in line with our target PER for other large-cap planters. Our TP implies a Fwd. PER of 24.5x on CY16E EPS of 29.2 sen, or close to -0.5SD valuation which we believe is fair given SIME’s weaker non-Plantation segments’ outlooks.

Risks to Our Call

Higher-than-expected CPO prices.

Higher-than-expected earnings from nonplantation divisions

Source: Kenanga Research - 25 Mar 2016