SIME announced the disposal of 805 acres of land to I&P Group Sdn. Bhd. for RM428.8m and proposed to acquire 768.5ha of plantations with a 70TPH mill from I&P for RM106.7m. We are unsurprised as the deal is part of its ongoing monetisation efforts, while the plantation valuation appears to be valued at RM103.1k/planted ha given scarcity factor. CNP maintained, with MARKET PERFORM call and TP of RM7.90 based on Sum-of-Parts.

Sells development land, buys plantation land. Sime Darby Berhad (SIME) announced that its 93% indirectly owned subsidiary, The Glengowrie Rubber Company Sdn. Bhd. (Glengowrie) has entered into a Sale and Purchase agreement with I&P Group Sdn. Bhd. (I&P)’s wholly-owned Petaling Garden Sdn. Bhd. (Petaling Garden) to dispose two parcels of land totalling 805 acres for a total cash consideration RM428.8m. Separately, SIME’s wholly-owned subsidiary Sime Darby Plantation Sdn. Bhd. (SDP) proposed to acquire two plantation estates in Johor totalling 768.5 hectares (ha) and a 70TPH palm oil mill from I&P’s wholly-owned subsidiaries Yong Peng Realty Sdn. Bhd. (YPR) and Perusahaan Minyak Sawit Bintang Sdn. Bhd. (PMSB) for a cash consideration of RM106.7m.

Neutral impact. We are not surprised at the land disposal is part of SIME’s ongoing plans to monetise its assets. SIME expects a total gain on disposal of RM295.7m, which we exclude from our Core Net Profit (CNP) forecast due to the one-off nature of the transaction. Meanwhile, although the purchase of plantation land, particularly in Peninsular Malaysia, comes as a surprise, we think the valuation at RM103.1k/planted ha appears reasonable considering its location and decent 2015 average yield of 22MT/ha. In comparison, brownfield plantation in Sabah is priced at c.RM90k/ha. However, we note that the newly acquired land is <1% of SIME’s Malaysian estates and hence should have a minimal impact to earnings going forward. We gather that the disposal and purchase are separate transactions and should be completed by early-FY18. Meanwhile, we expect net impact of the deal to have no significant impact to FY17- 18E gearing of 0.2x.

Maintain FY17-18 CNP at RM2.26-2.44b as the plantation land transaction will have minimal impact to earnings. However, FY17-18E Net Profit (NP) is increased by 9-0% to RM2.73-2.44b on one-off disposal gains.

Maintain MARKET PERFORM with unchanged TP of RM7.90. Note that our TP is fully diluted for the upcoming 5% share placement. We maintain our TP at RM7.90 based on Sum-of-Parts with unchanged Plantation segment valuation of 24.0x, in line with other big-cap planters. Our TP implies a Fwd. PER of 22.7x or about -1.1SD 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 short-term CPO prices for the Plantation segment.

Source: Kenanga Research - 7 Oct 2016