Its wholly-owned subsidiary, Sime Darby Overseas (HK) Limited had entered into agreements with Jining Port and Shipping Development Group Co., Ltd (JPSDG) to dispose Jining River Ports (Yuejin, Lonnggong, & Taiping) at RM182.7m (c.RMB293.9m) on 1.01x P/Book valuation with estimated net loss of RM8m on transaction value (after factoring forex loss) on staggered basis over the next three years. With earnings impact of less than 1% at the group level, we are neutral on the disposal. Maintain MP and TP of RM2.30.
Jining Ports Disposal at RM182.7m (c.RMB293.9m) over three years. Its wholly-owned subsidiary, Sime Darby Overseas (HK) Limited had on 30 November 2020, entered into the following: (i) Equity transfer agreements (Phase 1) with Jining Port and Shipping Development Group Co., Ltd (JPSDG) to divest its entire 70% equity interest in the Jining Port Companies for RMB293.9m cash (c.RM181.6m), (ii) Shareholders’ agreement to subscribe to 49% equity interest in Jining Port and Shipping Port Services Co. Ltd (JPSPS) for RMB199.9m (c.RM123.5m), and (iii) Equity transfer agreements (Phase 2) with JPSDG to divest its entire 49% equity interest in JPSPS for RMB213.7m cash (c.RM132.0m) over three years. The total disposal proceeds to be received by SIME is RM182.7m (RMB293.9m), based on average proceeds post-completion of agreements and to be completed in staggered basis over the next three years (backed by bank and corporate guarantee). Note that, Jining Port and Shipping Development Group Co., Ltd (JPSDG) is a special purpose company to undertake consolidation of ports in China.
Impact to financials. Net book value for the Jining ports is at RM172m as at 31st Oct 2020. The disposal is based on P/Book valuation of 1.01x as at 30 June 2020 with estimated net loss of RM8m in transaction value (after factoring forex loss). Jining Ports on average registered c.RM5m in PATAMI for the last five years and will be recorded as discontinued operation moving forward. With the disposals on staggered basis for the next three years, we expect the impact to the group earnings to be fairly minimal, less than 1% each year, with fairly minimal impact to its NTA position (less than 1.0 sen/year)
Rationale of the divestment. The proposed divestment is aligned to SIME’s ongoing efforts to rationalise its non-core assets. The agreements allowed for a staggered exit from its investment in three Jining Ports over three years. The port operations are facing continued downward pressure on margins due to intense competition from neighbouring ports, and additional costs. The disposal is also in line with the exercise being undertaken by the Jining government to consolidate the fragmented river port industry in Jining. Post-disposal, there will be one more port left under SIME (Weifaing Ports with contribution on average around RM20- 30m in PATAMI).
Outlook. Management noted that most of the group’s operations are in countries/territories that are not subject to significant movement restrictions and the recovery in motor vehicle sales has generally been strong. However, there is also disruption risk to supply chains that may limit sales as there may not be sufficient inventories for certain new models to meet sales. Increased infrastructure spending from fiscal stimulus measures by various countries would support equipment sales for the Industrial division. However, lower coal prices and import restrictions by China may adversely impact equipment sales in Australia.
Maintain MARKET PERFORM with SoP-derived TP of RM2.30 which implied PER of 13x on FY21E EPS. Risks to our call include: (i) lower- than-expected car sales volume, and (ii) lower-than-expected industrials contribution.
Source: Kenanga Research - 2 Dec 2020
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