Sime  Darby’s  FY14  results  were  in  line  with  expectations.  Going forward,  although  earnings  prospects  remain  rather  subdued,  we believe  news  flow  surrounding  its  potential  restructuring/demerger proposals  could  provide  some  support  to  the  stock’s  share  price. Maintain  our  NEUTRAL  recommendation  with  MYR9.80  FV  (from MYR10.40).

In  line.  Sime  Darby’s  FY14  core  net  profit  was  in  line,  coming  in  at 100%-108%  of  our  and  consensus  FY14  forecasts.  It  recorded  an exceptional income (EI)  gain of MYR128.8m in 4QFY14, bringing FY14 EI gains to MYR333.2m. It  declared a final net DPS of 30 sen, bringing FY14 net DPS to 36 sen, which translates into a net payout of 65%  or a net dividend yield of 3.8% for FY14.

Key  briefing  takeaways.  i)  FY15  FFB  production  target  of  5%;  ii) outlook  for  the  industrial  unit  remains  cautious,  with  management bracing  for  another  two  years  of  pain;  iii)  strong  recovery  in  property division in 4QFY14; and iv) motor division’s  listing is on the way. 

Forecasts  lowered.  After  adjusting  for  FY14’s  earnings,  we  lower  our forecast  by 4.7% for FY15 and introduce our FY16 forecasts. Our FY15 earnings  revision  also  takes  into  account  the  absence  of  the  power division as the disposal was  completed in 4Q14,  and a reduction in our projections  for  the  heavy  equipment  division. We  highlight that  we  are going to review our CPO price assumptions post-results season and as such,  maintain  our  assumptions  of  MYR2,800/tonne  for  FY15  and MYR2,900/tonne for FY16 for now. Every MYR100/tonne change in CPO price could impact the company’s net profit by 4-6% per annum. 

Maintain  NEUTRAL.  Post earnings revision and after updating for Sime Darby’s latest net debt, our SOP-based FV is reduced to MYR9.80 (from MYR10.40).  We maintain our NEUTRAL  recommendation on the stock. Although  earnings  prospects  remain  rather  subdued,  we  believe  newsflow  surrounding  Sime  Darby’s  potential  restructuring/demerger proposals could provide some support to the stock’s share price.

Key briefing highlights

Core net profit fell 8% y-o-y in FY14 on the back of a 5% drop in revenue. The fall in  profit  was  due  to  a  weaker  performance  at  its  plantations  (due  to  lower  FFB production),  heavy  equipment  (lower  sales  volumes  and  weaker  margins  in Australia), motor (flattish sales volumes but margins shed  0.5ppts y-o-y); and energy & utilities divisions (from weaker margins in  the engineering services division); offset by  improved  performance  at  its property  division (coming  from  strong contributions from its Elmina East project and construction profit recognised at its Pagoh Education Hub.

Key briefing takeaways. i)  FFB production target for FY15 of 5%; ii)  outlook for the industrial unit  remains  cautious,  with management bracing for another two years of pain; iii) strong recovery in  property division in 4QFY14; and iv) motor division listing is on the way.

FFB  production  growth  target  for  FY15  of  5%.  Despite  4Q14’s  improvement  in FFB production of +9% q-o-q, Sime Darby  closed the year with  a  7% y-o-y drop in FFB  production,  due  mainly  to  the  disappointing  output  in  the  first  9M  of  the  year caused by: i) a shift in cropping patterns in Kalimantan and certain parts of Malaysia; ii) biological tree stress;  as well as iii) the impact of extreme weather conditions in 1Q14. This was slightly  worse than our our projected  -6.3% forecast for FY14, while management expects FFB production to  improve   from hereon, as weather looks to be  relatively  normal  in  both  its  Malaysian  and  Indonesian  estates.  Management expects CY14’s FFB production to peak in October-November.  To be conservative, we  are  maintaining   our  FY15-16  FFB  growth  projection  at  3-4%  per  year.  Sime Darby’s average production cost in FY14 was MYR1,500/tonne. Cautious outlook for industrial unit maintained.  The industrial division recorded a22%  y-o-y  decline  in  EBIT  in  FY14  mainly  due  to  lower  equipment  deliveries  and product support sales from the Australasian region (-47% y-o-y). 

While its orderbook remains relatively healthy at MYR2.8bn (+7.7% q-o-q), there is a likelihood that the recognition of this orderbook could be stretched a bit longer than the  usual  12-24  month  time  period.  Management  is  bracing  itself  for  another  two years  of  difficult  operating  environment  in  Australia,  as  the  recovery  in  the  mining sector has yet to materialise amidst low coal prices and a relatively strong Australian dollar. Given this scenario, and the likely squeeze in EBIT margins which will ensue, we are reducing our projections to reflect a 2-3% decline per year  for FY15-16 (from 3-4% growth previously).

Property  division  saw  a  strong recovery  in  4Q14.  The  property  division  saw  a marked  improvement in  earnings in the  4Q14,  with  a  193%  q-o-q jump in  revenue and  an  almost  fifteen-fold  spike  in  EBIT.  This  was  mainly  due  to  recognition  of construction  profit  from  its  Pagoh  Education  Hub  of  approximately  MYR100m  in 4Q14,  as  well  as  continued  strong  sales  at  its  City  of  Elmina  development. Management  noted  that  the  average  take-up  rate  at  its  33  development  projects launched in FY14 was 75%. Going forward, management continues to be optimistic on the outlook for its property division, given the fact that 70% of its product offerings are  considered  medium-cost  at  <MYR750k  per  unit.  In  addition,  there  is  another MYR100m  in  construction  profit  for  the  Pagoh  Education  Hub,  which  will  be recognised  in  FY15.  Our  forecsts  for  FY15-16  reflect  a  5-6%  annual  increase  in EBIT contributions from the property division for FY15-FY16.

Motor  division  listing  is  on  its  way.  Management  has  confirmed  that  the  motor division is en-route to listing in Malaysia and it has already appointed bankers for this exercise. When queried as to why the motor division was chosen to be the first to be spun  off,  management  stated  that it  believed  that  the motor  division  was the most ready  in terms of regional footprint and  potential growth. Management also believes that valuation of this division upon listing could be similar to Sime Darby’s current P/E valuation  of  18-19x. We  are  not  as  optimistic,  given  that motor  stocks  in  Malaysiatrade at forward P/Es of 9-13x, while earnings growth for its  motor division seems to be  on  a  downward  trend  (EBIT  -10%  y-o-y  in  FY14),  on  the  back  of  intensifying competition.

Risks
The main risks include: i) a  convincing reversal in crude  oil price trends, resulting in a reversal of CPO and other vegetable oil prices; ii) weather abnormalities resulting in an over-  or under-supply of vegetable oils; iii) change in emphasis on implementing global biofuel mandates and trans-fat policies; and iv) a slower-than-expected global economic recovery, resulting in lower-than-expected demand for vegetable oils.

Forecasts
Forecasts  lowered.  After adjusting for FY14’s earnings, we  lower our forecasts by 4.7% for FY15 and introduce our FY16 forecasts. Our  FY15 earnings  revision  also takes into account  the absence of the power division as the disposal was completed in  4Q14  and  a  reduction  in  our  projections  for  the  heavy  equipment  division.  We highlight that we are going to review our CPO price assumptions post-results season and  as  such,  maintain  our  assumptions  of  MYR2,800/tonne  for  FY15  and MYR2,900/tonne for FY16 for now. We highlight that every MYR100/tonne change in CPO price could impact the company’s net profit by 4-6% per annum.

Valuation and recommendation
Maintain  NEUTRAL.  Post  earnings  revision  and  after  updating  our  numbers  to impute  its  latest  net  debt,  our  SOP-based  FV  is  adjusted  down  to  MYR9.80  (from MYR10.40).  We  maintain  our  NEUTRAL  recommendation  on  the  stock.  Although earnings prospects remain rather subdued, we believe news  flow surrounding Sime Darby’s potential restructuring/demerger proposals could provide some support to the stock’s share price.

Source: RHB