Sime Darby Berhad (SIME) FY17 Core Net Profit (CNP*) came in at RM2.35b (with discontinuing ops in Plantation and Property), meeting estimates at 104% of consensus and 101% of our forecast. A final dividend of 17.0 sen was declared for FY17 DPS of 23.0 sen, or 82% of our estimated 28.0 sen. No changes to FY18 estimates. Reiterate MARKET PERFORM with unchanged TP of RM9.50 as we believe the spin-offs of its property and plantation units have been fully priced-in.

FY17 within expectations. SIME recorded FY17 CNP of RM2.35b including discontinuing Plantation and Property earnings, in line with consensus’ RM2.26b at 104% and our RM2.33b estimate at 101%. Note that our CNP calculation excludes one-off asset impairments, including Plantation’s Liberia ops (RM202m), Industrial’s Bucyrus (RM257m) and Property’s unsold stocks (RM149m). FFB production at 9.78m metric tons (MT) was in line at 102% of our forecast. A final dividend of 17.0 sen was declared for full-year dividend of 23.0 sen, below our forecasted 28.0 sen at 82% and implying a dividend payout ratio of 63% - lower than FY16’s 72%, but in line with the 5-year hist.avg of 62% and 50% dividend policy. Separately, SIME also announced further details on its Plantation and Property listing exercise, such as (i) restructuring of borrowings, (ii) transfer of assets and settlement of intercompany balances, (iii) proposed share split in the Plantation and Property businesses, followed by equal distribution to existing shareholders and listing on the Main Market, and (iv) option agreements between SIME, Plantation and Property businesses (refer overleaf for details).

Plantation jumps. YoY, FY17E CNP rose 20% on higher Plantation core PBIT (ex-impairment) of RM2.2b (+124%) due to higher CPO prices (+27%) and FFB growth (+2%), offsetting lower core PBIT from Industrial (-41% to RM226m) on lower Malaysia contribution, and softer Property core PBIT (-48% to RM400m) on lower Pagoh contribution. Motors core PBIT improved 30% to RM653m on higher local assembly and luxury demand. QoQ, CNP rose 16% on higher Motors core PBIT (+107%) as noted and stronger Property core PBIT of RM142m, reversing from core loss of RM17m, due to higher Battersea deliveries (RM53m) and stronger earnings at Elmina West. However, Plantation core PBIT fell 17% to RM593m on lower CPO prices (-9%).

Awaiting spinoff. Management noted that they are on track for listing of their Plantation and Property arms by end-2017 (refer overleaf for timeline guidance). With the deconsolidation, we expect Motors and Industrial segments to drive earnings going forward. Management is hopeful of stronger Motors performance on new launches and reorganization in overseas divisions. Industrial prospects are gradually recovering as coal and iron ore prices pick up. Meanwhile, Plantation prospects are bright given its status as the world’s largest certified palm oil producer with integrated supply chain, and Property outlook is longterm sustainable thanks to its substantial strategic land bank and overseas projects in UK and Australia.

Maintain FY18E CNP at RM2.29b, while introducing FY19E CNP of RM2.34b (RM642-839b excluding discontinuing segments). No change to FY18E forecasts as FY17 numbers are in line with our estimates.

Reiterate MARKET PERFORM with unchanged TP of RM9.50 based on Sum-of-Parts, as we roll forward our valuation base year to CY18E (from FY18E). Our Plantation segment valuation is unchanged at 26x, implying a 5% premium to average big-cap PER of 25.0x. As we believe the market has already fully priced in the proposed listing structure of the Plantation and Property divisions based on our SoP valuations, we maintain our MARKET PERFORM view on the stock.

Source: Kenanga Research - 28 Aug 2017