INVESTMENT HIGHLIGHTS

• 1QFY17 core earnings below expectation

• Plantation division FFB volume is lower than expected

• Earnings estimate reduced

• Management KPI of RM2.20b net profit for FY17

• Maintain NEUTRAL with lower TP of RM7.70

1QFY17 core earnings below expectation: At 9% of consensus and 11% of our full year FY17 Core Net Profit (CNP) estimate, Sime Darby Berhad (SIME) 1QFY16 CNP of RM207m was below expectation. The impact of Super El Nino has been greater than expected on SIME’s plantation division causing the division’s FFB volume to decline 24%yoy to 2.15m MT in 1QFY17. For our CNP calculation, we have excluded: i) RM198m gain on disposals (mainly RM131m from disposal of investment property in Singapore and RM35m gain from disposal of 10% stake in E&O), ii) forex gain of RM88m, iii) inventory write-down of RM38m and iv) net impairment of RM12m.

Core earnings declined against last year: Compared to last year, 1QFY17 CNP declined 32%yoy to RM207m due to lower earnings from plantation division (EBIT -10%yoy to RM273m) and industrial division (EBIT -19%yoy to RM51m). Positively, motor division earnings improved (EBIT +53%yoy to RM130m) due to improved earnings in Malaysia, Singapore and New Zealand operations. Lastly, property division benefited from gain on disposals as explained previously.

Core earnings estimate reduced: FY17 earnings CNP has been reduced by 1% to RM1.94b. We have assumed lower FFB yield for SIME’s plantation division.

Management KPI of RM2.20b net profit: The KPI is 10% higher than FY16’s target of RM2.00b. Key parameter behind the KPI is average CPO price of RM2650/MT.

Maintain NEUTRAL with TP of RM7.70: Our Target Price is lowered in line with the Sum-Of-Parts based valuation (refer Page 3). Despite the weak core earnings in 1QFY17, its share price is supported by decent dividend yield of 3.3%

Source: MIDF Research - 28 Nov 2016