• 1HFY17 core earnings below expectation

• Improved core earnings against last year

• Pure play strategy to be performed via dividend in specie

• Core earnings estimate reduced

• Maintain NEUTRAL with lower TP of RM9.00

1HFY17 core earnings below expectation: Sime Darby Berhad (SIME) 1HFY17 Core Net Profit (CNP) of RM862m missed expectation as it only makes up 38% of both consensus and ours full year earnings estimate. Earnings from industrial division disappointed as its 1HFY17 EBIT unexpectedly declined 21% to RM106m (against our estimate of slight increase) due to lower engine deliveries to oil & gas and marine sectors in Singapore. For our CNP calculation, we have excluded: i) RM215m gain on disposals (mainly RM131m from disposal of investment property in Singapore, RM35m gain from disposal of 10% stake in E&O and RM58m from compulsory acquisition of land), ii) forex gain of RM114m, iii) inventory writedown of RM92m and iv) net impairment of RM12m. The Company announced an interim dividend of 6.0 sen per share and this is within our estimate. The ex-date is 19-Apr-2017.

Improved core earnings against last year: Compared to last year, 1HFY17 CNP increased 36%yoy to RM862m due to improved earnings from plantation (EBIT +82%yoy to RM841m), motors (EBIT +15%yoy to RM266m) and property divisions (EBIT +65% yoy to RM309m). Plantation division benefited from better CPO price (+32% yoy to RM2835 per MT). Motors division improved EBIT is due to higher contribution from Malaysia, China and New Zealand markets. Finally, property division EBIT is higher due to recognition of RM95m profit from its 40% stake in Battersea.

Pure play strategy to be performed via dividend in specie. Recall that SIME has announced its plan to demerge the current SIME into three pure plays on 26-Jan. These will be Plantation, Property and Trading & Logistics. During the briefing, more details were shared in which the demerger will be done via dividend in specie. As a result, the shareholding structure of 3 entities will remain unchanged. Timeline will be end of 2017 or early 2018.

Core earnings estimate reduced: FY17 earnings CNP has been reduced by 1% to RM2.25b. We have assumed lower sales for SIME’s industrial division.

Maintain NEUTRAL with lower TP of RM9.00: Our Target Price is lowered in line with lower value of industrial division in our Sum-Of-Parts based valuation (refer Page 3). Despite the weak core earnings in 1HFY17, its share price is supported by decent dividend yield of 3.5% and the expectation of value creation from the demerger corporate exercise.

Source: MIDF Research - 28 Feb 2017