SIME’s FY16 CNP at RM1.70b exceeded our and consensus forecasts at 110% on higher-than-expected margin recovery in Industrial and Motors segments and substantial 4Q16 tax credits (RM128m) due to special tax incentives (RM348.5m). Final dividend of 21.0 sen making full-year total DPS to 27.0 sen, above forecasted 21.0 sen. FY17E earnings upgraded 6% to RM2.18b, while we introduce FY18E CNP of RM2.44b. Maintain MARKET PERFORM with higher post placement TP of RM7.90 based on Sum-of-Parts.

FY16 results above expectations. Sime Darby Berhad (SIME)’s FY16 Core Net Profit (CNP*) at RM1.70b exceeded both our and consensus forecasts of RM1.54b, making up 111% of both full-year forecasts. This was driven by betterthan- expected margin recovery in Industrial and Motors segments and positive tax credits of RM128.4m in 4Q16m, mainly due to an Indonesian special tax incentive of RM348.5m. A final dividend of 21.0 sen was announced, for full-year dividend of 27.0 sen, above our 21.0 sen forecast. SIME also announced that it will undertake a 5% placement for estimated proceeds of RM2.38b based on an indicative issue price of RM7.51/share.

Boosted by one-off. YoY: FY16 CNP fell 22% to RM1.70b on weaker Plantation and Industrial performance. For Plantation, EBIT weakened 18% despite flat FFB production (partly from NBPOL contributions) as group FFB yield declined 7% to 18.8 metric tons (MT)/hectare (ha), leading to narrower margins. Average CPO price received was also flat (+2%) as Indonesian CPO prices declined 4% on the mid-2015 CPO levy. Industrial EBIT weakened 37% on weaker equipment demand, especially in Australasia and Malaysia.QoQ: 4Q16 CNP saw substantial improvement, doubling to RM1.02b on stronger Plantation, Motors and Industrial performance, as well as the aforementioned one-off tax incentive. PBT improvement was more modest at +38%, driven by a 4.4x jump in Plantation EBITon higher CPO prices (+20%) and better downstream performance (+65% QoQ to RM77.2m) due to improved demand in Europe. Motors saw EBIT improvement (+165%) across all key regions, with an earnings turnaround in Malaysia and strong growth in China due to better luxury vehicle demand. Meanwhile Industrial EBIT also rose 73% on better construction demand and stabilising coal prices.

Placement to be earnings dilutive. We are not surprised on the proposed 5% placement as SIME has been rumoured to be looking at fund-raising measures for the last 1-2 quarters. The expected proceeds of RM2.38b are to be utilised to: (i) repay borrowings (RM1.20b), (ii) fund capex in the Plantation, Motors and Property businesses (RM950m), (iii) fund working capital (RM212m), and (iv) repay expenses related to the placement (RM14m). Nevertheless, we are slightly negative on the placement impact, as we expect potential EPS dilution (c.1.6 sen/share) to exceed savings on interest cost (c.0.8 sen/share). We estimate slightly lower post-placement FY17E net gearing at 0.18x, from 0.24x previously.

We upgrade FY17E CNP by 6% to RM2.18b as we tweak Motors and Industrial margin expectations for a slight recovery as noted overleaf. We also introduce our FY18E CNP of RM2.44b representing 12% YoY earnings growth.

Maintain MARKET PERFORM with higher post placement TP of RM7.90(from RM7.75) after accounting for: (i) rolling forward the valuation base year to CY17E (from FY17E), (ii) full dilution effect of proposed 5% placement, and (iii) FY17E earnings upgrade. Our TP is based on Sum-of-Parts with Plantation segment valuation maintained at 24.0x PER, in line with other big-cap planters. Our TP implies a Fwd. PER of 23.5x or about -0.9SD valuation. We think this is fair as weak local sentiment could continue to weigh on Property and Motors’ Malaysian operations, which could limit its upside despite seeing supportive CPO prices for Plantation segment.

Source: Kenanga Research - 24 Aug 2016