1Q17 CNP at RM244m came in at 11% of consensus’ RM2.25b and our RM2.26b forecasts, which we deem broadly within expectations as we expect stronger contribution in 2Q-3Q17 on the back of higher CPO prices and delivery of Battersea Phase 1. No dividend announced, as expected. Maintain FY16-17E CNP at RM2.26-2.44b. Our MARKET PERFORM call is unchanged with higher TP of RM8.20 as we update our Industrial segment valuation.

1Q17broadly within. Sime Darby Berhad (SIME)’s 1Q17 Core Net Profit (CNP*) at RM244m came in at 11% of both consensus (RM2.25b) and our forecast (RM2.26b), which we deem broadly within expectations as we expect improvement in 2Q-3Q17 on the back of higher CPO prices, stable production, and start of delivery of Battersea Phase 1. No dividend was announced, as expected. SIME also announced its 2017 Net Profit KPI of RM2.20b, which is in line with consensus and our CNP forecast, but below our RM2.73b Net Profit which includes announced disposals of c.RM470m (sale of assets in Selangor and Australia).

Lacklustre core performance. YoY, 1Q17 CNP weakened 18% with Plantation PBIT declining 10% as higher CPO prices failed to offset a 24% volume drop due to lagged drought effect. Excluding one-off disposal gains (sale of E&O stake for RM35m, sale of Singapore assets for RM131m), Property earnings dropped 94% to RM6m on deferred launches and lower completion progress. Excluding one-off disposal gains (sale of property for RM30m), Motors earnings improved 18% to RM100m on better mass vehicle demand in Malaysia and super-luxury demand in China market. QoQ, 1Q17 CNP dropped 76% due partly to the previous quarter’s tax credit of RM128m. Plantation earnings weakened 45% despite relatively flat CPO price (-2%) and production (+2%) but we expect improvement in 2Q17 as we understand some shipments were delayed towards end-1Q17 to the next quarter. Core Property PBIT at RM6m was 90% weaker against 4Q16’s RM29m as some launches during the quarter had been brought ahead in 4Q16. Industrial segment weakened 41% on softer marine demand in Singapore due to poor oil prices.

Gradual improvement. Going forward, we expect to see gradual quarterly improvement with 2Q16 driven by better CPO prices, while 3Q16 should see the bulk of contribution from delivery of Battersea Phase 1. We think Industrial segment’s prospect should improve as higher coal prices prompt miners to invest in equipment, though Marine outlook is likely to remain weak for the time being. We gather that with management starting another strategic review of SIME’s individual businesses, major growth plans in FY17 may be put off pending completion of the review.

No change to FY17-18E CNP at RM2.26-2.44b as we expect stronger quarters ahead.

Maintain MARKET PERFORM with higher TP of RM8.20 (from RM7.90) based on Sum-of-Parts. We maintain our Plantation segment valuation at 24.0x PER, in line with other big-cap planters but up our Industrial segment valuation to 15.0x (from 8.0x) reflecting unchanged 50% discount to their principal company Caterpillar (CAT)’s latest Fwd. PER of 29.4x. However, we remain neutral on SIME’s prospects: brighter Plantation and Industrial segment prospects driven by better commodities prices will be offset by weak local demand and tight credit conditions, particularly affecting the Property and Motors segments, and ongoing strategic review may hold back mid-term growth

Source: Kenanga Research - 28 Nov 2016