Its wholly-owned Sime Darby Allied Products Bhd, and Sime Darby Holdings Bhd have entered into agreements with C.P. Retail Development Company Limited (CP), Tesco Holdings B.V. (Tesco BV) and Tesco PLC for the disposal of its 30% stake in Tesco Malaysia to CP for RM300m cash which could be used for: (i) paring down borrowings, (ii) cash reserve, or (iii) special dividend (4.0 sen/share or yield of c.2%). With earnings impact of less than 1% at the group level, we are neutral on the disposal. Maintain MP and TP of RM1.75.

Selling Tesco Malaysia for RM300m, net gain of c.RM270m. Its wholly-owned subsidiaries Sime Darby Allied Products Bhd (SDAPB) and Sime Darby Holdings Bhd have entered into conditional agreements with C.P. Retail Development Company Limited (CP), Tesco Holdings B.V. (Tesco BV) and Tesco PLC for the disposal of SDAPB’s 30% stake in Tesco Malaysia to CP in accordance with its rights under a JV agreement dated 28th November 2001. The proposed disposal is pursuant to the entry of Tesco BV into agreement with CP on 9th March 2020, which is a part of a larger deal to sell Tesco PLC’s businesses in Thailand and Malaysia to CP for an enterprise value of USD10.6bn, with an estimated Tesco Malaysia’s enterprise value of USD700m, including USD600m of net debt. The total disposal proceeds to be received by SIME is RM300m with estimated net gain of RM270m and to complete in 2HCY2020.

Impact to financials. There was no financial information on Tesco Malaysia shared by the group, but we believe that Tesco Malaysia is a loss-making company due to intense competition in the retail market especially from AEON, and recently further affected by the negative impact of the Movement Control Order (MCO). With this disposal, we expect positive impact to the group earnings for FY21, albeit marginal given that Tesco Malaysia contribution has been written down to zero. The group noted that proceeds from the disposal can be used for: (i) paring down borrowings, (ii) cash reserve, or (iii) special dividend (4.0 sen/share or yield of c.2%). For illustrative purposes, assuming interest savings of RM10.8m/year (average at 3.6% rate), the disposal would have minimal positive impact to our FY20E and FY21E CNPs. The estimated gain will raise SIME’s NTA from RM2.20 (as at 31st Dec 2019) to RM2.24.

Rationale of the divestment. The proposed divestment is aligned to SIME’s ongoing efforts to rationalise its non-core assets. This deal provides SIME with an opportunity to exit the non-core hypermarket business at a reasonable valuation (undisclosed).

Outlook. Management noted that the Covid-19 outbreak could slow down its 2HFY20 motor sales especially in China, while awaiting the government stimulus to soften the negative impact until the outbreak is contained. Note that China has partially recovered and is ready to support the group with some "pent-up spending" from the Auto segment (BMW vehicles). Furthermore, the Covid-19 outbreak is expected to impact industrial supply chain in Australasia for certain construction equipment and parts (unquantified at the moment). Nevertheless, the Industrial division in Australia continued to show growth as a result of the mining segment recovery and in the longer term, sales contribution from Gough Group NZ at c.RM1b/year could boost its order-book further.

No changes to our estimate as we have already factored in the negative impact of MCO into our forecasts. Note that, we have cut our FY20E/FY21E CNP by 3%/4% in our Automotive strategy dated 2nd April 2020. Maintain MP with a TP of RM1.75 based on Sum-of-Parts (SoP) which implied PER of 12x on FY21E EPS. Risks to our call include: (i) a sharp downturn in the economy leading to lower-than-expected car sales volume, and (ii) unfavourable forex.

Source: Kenanga Research - 23 Apr 2020