SIME recently announced a tender invitation for the repurchase of its 2018 and 2023 sukuk totalling USD800.0m. Meanwhile, SPSETIA announced the acquisition of 342.5 acres land in Bangi from SIME’s 40%- owned associate Seriemas for RM447.6m. We are neutral on both developments, though we upgrade FY18E NP by 6% to reflect one-off gains. Maintain MARKET PERFORM with unchanged TP of RM9.50 based on SoP.

Sukuk repurchase and associate’s land sale. Sime Darby Berhad (SIME) recently invited eligible holders of its outstanding 2018 and 2023 sukuk to tender the respective sukuk (totaling USD800.0m) for repurchase. The company also announced a consent solicitation seeking the substitution of Sime Darby Plantation Sdn. Bhd. (Plantation) as the new obligor for the said sukuk, among other adjustments to the terms and conditions. Separately, SP Setia Berhad (SPSETIA) recently announced the acquisition of 342.5 acres of land in Bangi, Selangor from Seriemas Development Sdn. Bhd. (Seriemas) for RM447.6m. Seriemas is a 40%-owned associate of SIME, with the other 60% held by Permodalan Nasional Berhad (PNB).

Limited earnings impact on sukuk repurchase. We are neutral on the tender invitation as our estimates imply only marginal positive net interest impact of <1% of FY18E CNP, assuming the tender is fully subscribed. We note that despite the low coupon rate of 2.0% and 3.3% on the 2018 and 2023 sukuk, respectively, due to the weakening of the ringgit post-2013 issuance, we estimate an effective interest rate closer to 3.7%. This is less favorable compared to its conventional financing rates of 3.1-3.3% in FY16. If the tender is fully subscribed within the early tender deadline, the potential maximum outlay for repurchase of both sukuk could be RM3.58b. Assuming an 80-20 debt-equity ratio, we estimate that a full repurchase could result in interest savings of c.RM15.0m in FY18, or <1% of CNP. Thus, with the relatively small interest savings from the move, we maintain our core earnings figures for now.

Associate sale of Bangi land. We are also neutral on the recently announced land sale by SIME associate Seriemas to SPSETIA (please refer to our SPSETIA report published 17-Apr for details), as we exclude one-off disposal gains from our CNP estimate. However, we calculate a gain on disposal of RM411.5m for Seriemas which translates to an associate gain of RM164.6m for SIME. The deal is expected to be completed by 4QCY17. Accordingly, we up our FY18E NP estimate by 6% to RM2.42b, while CNP is unchanged.

Increase FY17-18E CNP by 0-6%; CNP maintained. As outlined above, we increase our FY18E CNP by 6% to RM2.42b to account for one-off gains from the Seriemas land sale.

Reiterate MARKET PERFORM with unchanged TP of RM9.50 based on Sum-of-Parts. Our Plantation PER valuation is unchanged at 26.0x, implying a 5% premium to average big-cap PER of 25.0x. We believe that the market has already fully priced in the proposed listing structure of the Plantation and Property divisions based on our SoP valuations. Hence, we maintain our MARKET PERFORM call on the stock.

Source: Kenanga Research - 20 Apr 2017