1H17 CNP at RM892m missed expectations, at 40% of consensus RM2.24b and 36% of our RM2.50b forecast on weaker Industrial, Property & Logistics segments. Dividend of 6.0 sen announced; in line as 4Q16 should see the bulk of dividend pay-out. Reduce FY17-18E CNP by 7-6% to RM2.33-2.29b. With lower earnings and an underwhelming proposed listing structure, we downgrade SIME to MARKET PERFORM with lower SoP-based TP of RM9.60.

1H17 misses expectations. Sime Darby Berhad (SIME)?s 1H17 Core Net Profit (CNP*) at RM892m came in below expectations, making up 40% of consensus RM2.24b and 36% of our RM2.50b forecast. This was largely due to weaker-than-expected Industrial and Logistics performance coupled with continued weakness in the local Property business. An interim dividend of 6.0 sen was announced, matching 1H16 dividend, and in line as higher full-year dividend is typically paid in the 4Q. SIME also announced its proposed listing structure for its Plantation and Property segments, which we will comment on below.

Growing on Plantation. YoY, 1H17 CNP improved 39% as Plantation PBIT jumped 82% thanks to a 32% increase in CPO prices to RM2,739/MT. Excluding one-off disposals in 1Q17 (totalling RM166m) and 2Q17 (RM58m) and 1Q16 (RM55m), Property core earnings declined 36% to RM143m on slower construction progress in its local projects; though we note that SIME recognized its share of profit on the Battersea project of RM95m (PBIT level) during the quarter. Excluding property disposal (RM30m) in 1Q17, Motors earnings were flat (+2%) as better Malaysia, China and New Zealand performances were offset by weaker Vietnam performance (on higher consumption tax). Industrial contribution weakened (-14%) on lower marine contributions. QoQ, CNP jumped 1.7x as Plantation PBIT doubled, thanks to better CPO prices (+11%) and FFB production (+26%). Property core earnings also jumped 12x to RM79m thanks to Battersea PBIT contribution (RM95m) although this was limited by Malaysia property business core loss of RM16m. Motors core earnings weakened 18% on softer ASEAN ex-Malaysia contribution. Industrial PBIT improved 8% on better Malaysia and Australia performances.

Proposes 100% Plantation & Property distribution. SIME announced that its intention to conduct an internal restructuring and distribution of 100% of Sime Darby Plantation Sdn Bhd (?Plantation?) and Sime Darby Property (?Property?) businesses, which allows entitled shareholders to maintain the same proportion as their holdings in SIME upon completion (refer to details on page 3). We are neutral on the proposed listing structure as we expect limited benefits to existing shareholders aside from potential value creation upon listing, which is targeted for completion by late-2017/early-2018.

Reduce FY17-18E CNP at RM2.33-2.29b (-7-6%) as we lower our margin assumptions on Industrial and Logistics segments.

Downgrade to MARKET PERFORM with lower TP of RM9.50 (from RM9.88) based on Sum-of-Parts. We maintain our Plantation segment valuation at 26.0x implying a 5% premium to average big-cap PER of 25.0x. We lower our TP in accordance to our earnings downgrade. In view of the recent share price rally in anticipation of the Plantation/Property spinoffs, we think that our SoP valuations have also fully priced into the proposed listing structure. As a result, we downgrade our call to MARKET PERFORM.

Source: Kenanga Research - 28 Feb 2017