Sime Darby Berhad (SIME) 1Q18 Core Net Profit (CNP*) at RM875m (including discontinuing ops.) exceeded consensus and our forecasts at 36% and 38%, respectively, on strong Plantation and Battersea contributions. No dividend declared, as expected. We up our FY18-19E CNP by 15-7% reflecting better Industrial growth and Plantation margins. Maintain MARKET PERFORM with higher TP of RM9.65 based on Sumof-Parts.

1Q18 above expectations. 1Q18 CNP at RM875m came in above both consensus’ RM2.40b forecast at 36% and our RM2.29b estimate at 38% on the back of strong Plantation price performance (+4% YoY) and further recognition for the Battersea project at RM87m. Note that FFB production recovered strongly by 25% to 2.70m metric tons (MT) though this was in line with our expected 9.90m MT at 27%. No dividend was announced, as expected.

Powered by Plantation & Property. YoY, 1Q18 CNP jumped 2.6x on stronger Plantation PBIT (+53%) on both stronger FFB production (+25%) and prices (+4%). Property core contribution (ex-disposals) also improved by 1.8x to RM152m thanks to Battersea contribution as mentioned above. While Motors PBIT weakened 14%, after excluding the one-off impairment at its Vietnam business, core PBIT (ex-impairment) improved 33% to RM173m on sales improvements in Malaysia and China/HK, as well as lower losses from the disposal of its Australian/NZ Peugeot and Citroen businesses. Industrials core PBIT (ex-disposals) also rose 61% to RM82m, on better Australian sales on equipment and support. QoQ, CNP improved 9% on Industrial core PBIT recovery (+116%) on better Australian contributions. However, this was offset by weaker Motors (- 34%) performance on lower new launches and weaker Plantation (-14%) PBIT on lower CPO prices (-4%) despite slightly better FFB production (+10%).

Tentative valuations? For their upcoming listing of the Plantation and Property segments, the company also provided estimated reference prices for Plantation at RM5.43-6.26/share and for Property at RM1.45- 1.75/share while the SIME share price would be automatically adjusted to RM1.18-2.21/share. This is in line with our SoP valuation’s implied TP of RM5.84 for Plantation and RM1.47 for SIME, but slightly below our Property implied TP of RM2.35, potentially due to lower RNAV discount applied by SIME management.

Gradual recovery. Management noted that the Industrial segment has seen improvements recently for product support and better order-book as commodity prices recovered, while China and Malaysia operations remain supported by construction activity. On the Motors side, while sales volume should improve on launches, management discussed its plans to cease its distributorship and dealership in Vietnam due to operational constraints. On the Plantation side, the company expects prices to be supported above RM2,500/MT, while FFB production should improve by 6% thanks to post-drought recovery.

Upgrade FY18-19E CNP by 15-7% to RM2.64-2.47b as we tweak up our Industrial sales growth expectations reflecting order-book improvements, and adjust Plantation cost expectations to reflect better margins on supportive CPO prices and volume recovery.

Maintain MARKET PERFORM with higher TP of RM9.65 (from RM9.40) based on Sum-of-Parts. Our Plantation valuation basis is maintained at 26x Fwd. PER representing a 5% premium large-cap planters, which reflects SIME’s market leader position, while we apply a Property RNAV discount of 40%, which slightly exceeds IOIPG’s listing RNAV discount of 35%. We maintain our neutral outlook on SIME as we believe the market has fairly priced in the proposed listing structure in line with our SoP valuations. However, the strong 1Q18 results might provide a short-term buzz to investors who are looking to enter before the listing date that is tentatively slated for end-Nov.

Source: Kenanga Research - 17 Nov 2017