INVESTMENT HIGHLIGHTS

• Carving out plantation division?

• The news is positive to share price.

• Plantation division is a significant earnings contributor.

• Maintain BUY with TP of RM9.05.

Carving out plantation division? According to The Edge Malaysia (TEM), Sime Darby Berhad (SIME) is looking at carving out its plantation business as the first step of its wider demerger strategy. TEM further explained that SIME intends to conduct an IPO in 2HCY2017. For the news, TEM quoted “sources familiar with the matter”.

The news is positive to the sentiment on SIME share price. We believe that the potential corporate exercise involving SIME is likely to unlock the value of SIME as conglomerate. As a result, shareholders are likely to enjoy long term benefit (assuming that the corporate exercise goes through smoothly) from lower “conglomerate discount” attached by the market. Note that pure planters usually command higher PE valuation against conglomerates with many businesses.

Plantation division is a significant earnings contributor. In FY16, plantation division generated EBIT of RM1.05b or 34% contribution to the Group. The contribution is likely to increase in FY17 given the high CPO price.

Maintain BUY with TP of RM9.05. Our Target Price is based on Sum Of Parts (SOP) valuation. We continue to like SIME as: i) its plantation division is expected to benefit from high CPO price, ii) we expect positive news flow resulting from potential corporate exercise to unlock the value of the conglomerate and iii) decent dividend yield of 3.7%.

Source: MIDF Research - 23 Jan 2017