INVESTMENT HIGHLIGHTS

• FY17 core earnings met expectations

• Good performance from plantation and motors divisions

• Property division earnings declined

• Industrial division incurred operating loss of RM4m

• Maintain NEUTRAL with TP of RM9.05

FY17 core earnings met expectations: Sime Darby Berhad (SIME) FY17 Core Net Profit (CNP) of RM2.22b matched expectations as it makes up 99% of ours and 96% of consensus estimate. For our CNP calculation, we have excluded RM600m gain on property division disposals, RM254m impairments, RM203m inventory writedown, forex gain of RM156m, RM149m provision for property unsold stocks and net gain on disposal of RM72m.

Core earnings improved yoy due to good performance from plantation and motors division: Compared to last year, FY17 CNP increased 18%yoy to RM2.22b due to improved earnings from plantation (EBIT +92%yoy to RM1.98b) and motors (EBIT +26%yoy to RM633m) divisions. Plantation division benefited from better CPO price (+27% yoy to RM2848 per MT). Motors division improved EBIT is due to higher earnings from Malaysia, China and New Zealand markets.

Property division earnings declined. Property division EBIT declined 32%yoy to RM801m due to lower gains from asset monetisation and compulsory land acquisition.

Industrial division incurred operating loss of RM4m as compared to operating profit of RM341m in FY16. This is mainly due to an impairment charge for the Bucyrus distribution rights of RM214m and the provision for onerous contracts of RM43m for the leasing of Bucyrus equipment. Excluding these, core operating profit declined 26%yoy.

Pure play execution is on track. 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. The latest update is that the number of shares for Sime Plantation and Sime Property will be the same as the current Sime Darby. The Company plans to submit its Prospectus by end-August.

Maintain NEUTRAL with higher TP of RM9.05: Earnings estimate are maintained for FY18 and FY19. We have rollover our valuation to FY18. Our Target Price is based on Sum-Of-Parts based valuation. While SIME valuation at 25.7x PE appears to be high, its share price is supported by decent dividend yield of 2.7% and the expectation of value creation from the demerger corporate exercise.

Source: MIDF Research - 28 Aug 2017