Sime Darby (SIME)’s 9M16 Core Net Profit (CNP*) at RM979m was below consensus forecast at 54%, but we deemed it broadly within ours at 64% as historically, the average 4Q made up 34% of full-year CNP. No dividends as expected. Maintain earnings estimates and TP of RM7.75 but we upgrade SIME to MARKET PERFORM (from UNDERPERFORM) post-share price correction.

Broadly within our forecast. 9M16 CNP came in at RM979m, below consensus (RM1.80b) at 54%, but within our forecast (RM1.54b) at 64% as we are expecting a strong final quarter, which historically had turned in an average 34% of full-year results for the past 5 years. Note that Plantation performance was affected by weaker 3Q16 production at 2.01m metric tons (MT), or 21% of our FY16E forecast. Our 9M16 CNP calculation excludes the one-off sale of two Singaporean subsidiaries for RM600.8m with a gain on disposal of RM406m.

Soft earnings persist. 9M16 CNP declined 25% as Plantation EBIT fell 30% on weaker upstream performance, largely attributed to lower CPO prices received in Indonesia, which implemented a USD50/MT export levy in mid-2015. Industrial performance remained soft (9M16 EBIT -50%) on weaker Australian contribution due to the coal price slump. While 9M16 Property EBIT rose 63%, excluding one-off asset sales (9M16: RM545m; 9M15: RM175m), earnings declined 24% due to less units sold (-34% to 822 units). Motors performance was weaker (-8%) on soft local earnings (-79%) due to tighter lending and poor mass-market vehicle demand. Against 2Q16, CNP was flat at -1% with Property contribution jumping 5.9x on one-off asset sales as noted earlier. Excluding one-offs, Property contribution fell 54% on lower contribution at its Pagoh project. Plantation EBIT dropped 42% QoQ as FFB production declined 20% on delayed drought impact. However, Industrial earnings improved 9% QoQ as margins improved 0.4% to 3.3% due to cost-cutting efforts. Motor segment weakened 49% as Malaysian operations saw LBT of RM3.1m on stronger competition and tight lending.

Plantation & Property to improve in 4Q16. We believe 4Q16 should see earnings improvement, particularly in the Plantation and Property segments. On the Plantation side, we expect FFB volume to improve by at least 8% QoQ, while quarter-to-date (QTD) CPO prices to average RM2,640/MT, or +9% against 1Q16’s RM2,415/MT. Meanwhile, despite weak domestic sentiment, the Property segment should improve on the back of potential disposals of its Singaporean assets. Maintain FY16-17E CNP at RM1.54-2.05b as we expect better results in 4Q16.

Upgrade to MARKET PERFORM with unchanged TP of RM7.75. We maintain our TP of RM7.75 based on Sum-of-Parts. Our Plantation segment valuation is maintained at 24.0x PER, in line with other big-cap planters, applied to unchanged FY17E earnings. Our TP implies a Fwd. PER of 23.3x or about -0.8SD valuation. We think this is fair as weak consumer sentiment and low coal prices could depress earnings upside for the next 1-2 years. However, as share prices have corrected by 9% YTD, we believe the market has priced in potential long-term earnings weakness. Hence, we upgrade our call to MARKET PERFORM.

Source: Kenanga Research - 26 May 2016