Its wholly-owned subsidiary, Sime Darby Nominees SB, has entered into an agreement disposing its entire 10.89% stake in Eastern & Oriental Bhd (E&O), to Amazing Parade SB (APSB) for RM93.5m cash or RM0.60/share (premium of 33% over consensus TP at RM0.45, and 3% over last traded price of RM0.585). The disposal has been completed via DBT and total proceeds will be received upon the settlement on 30 March 2021. The pricing works out to 0.5x P/Book which we considered fair compared to the consensus ascribed P/Book of 0.48x and taking into account the deceleration of E&O business activities especially during the pandemic. With earnings impact of just 1% at the group level, we welcome the disposal at fair value, of this non-core asset. Maintain OP, but with a higher TP of RM2.55 (from RM2.40) on roll-over of valuation base year with additional DPS of c.1.0 sen expected from this disposal.

Disposal of 10.89% stake in E&O for RM93.5m cash or RM0.60/share. Its wholly-owned subsidiary, Sime Darby Nominees SB (SD Nominees), had on 26 March 2021, entered into a Share Sale Agreement (SSA) disposing of its entire c.10.89% stake in Eastern & Oriental Bhd (E&O), to Amazing Parade SB (APSB) for RM93.5m cash or RM0.60/share. The disposal has been completed on the day of signing. The total proceeds will be received by SD Nominees upon the settlement on 30 March 2021. On a separate note, the disposal has raised APSB and related parties’ aggregated shareholding to 42.71% and thus triggering an MGO.

Impact to financials. BV/Share for E&O is RM1.22 as at 31st Dec 2020. The disposal is based on P/Book of 0.5x as at 31st Dec 2020 which we considered fair compared to consensus ascribed P/Book of 0.48x and taking into account the deceleration of E&O business activities especially during the pandemic (consensus expecting FY21E to continue registering losses, at RM13.3m). E&O sank into losses of RM196m in FY20 compared to a profit of RM61.9m for FY19 with lower sales (-45%) with the completion of several development projects. For 9MFYE March 2021, E&O continued to record lower sales (-57%) and lower profit (-70%) especially under the pandemic situation. Based on SIME’s recent 6MFY21 results, E&O contributed share of profit at RM12m, or 1% of our FY21E CNP, which has fairly minimal impact to the group earnings and NTA position (less than 1.0 sen). The proceed from this disposal is expected to be distributed as a special dividend at c.1.0 sen. Note that, SIME has announced special DPS of 4.0 sen derived from the disposal gain of Tesco Malaysia (RM294m).

Rationale of the disposal. SIME bought into E&O in 2011. The disposal is aligned to SIME’s on-going efforts to rationalise its non-core assets since the demerger with SIME Property and SIME Plantation, hence we welcome the disposal of this peripheral asset.

Outlook. Management noted that most of the group’s operations are in countries/territories that are not subjected to significant movement restrictions and the recovery in motor vehicle sales has generally been strong. Motor vehicles sales continued to be on strong recovery path despite minor setback in global supply chain that may limit sales. Increased infrastructure spending from fiscal stimulus measures by various countries should support equipment sales for the Industrial division. Its Port operation continued to face competition from other ports especially with the Chinese government rationalizing ports operations to create a larger port entity.

Reiterate OP with a higher SoP-derived TP of 2.55 (from RM2.40) as we roll over our valuation base year to CY22, which implied PER of 14x on FY22E EPS. The stock now offers dividend yield of 6.3% as we upgrade FY21E DPS to 15.0 sen (from 14.0 sen).

Risks to our call include: (i) lower-than-expected car sales volume, and (ii) lower-than-expected industrials contribution.

Source: Kenanga Research - 29 Mar 2021