Sime answered many questions on its strategy for  the  spinning off  and listing of core units,  latest acquisition and potential  contributions from its  Battersea  project  at  our  IMHK  event  last  week.  Despite  its  rather subdued  earnings  prospects,  we believe news flow about  its  potential restructuring could support  its  share price.  Maintain  NEUTRAL, as we lift our SOP-based TP to MYR9.00 (from MYR8.75) a 1.4% downside.

Many questions  asked at  Invest Malaysia Hong Kong  (IMHK).  Sime Darby  (Sime)  participated  in  our  IMHK  event  last  week.  Questions abounded  about  the  group’s  strategy  going  forward,  in  relation  to  the spin-off and listing  of its core divisions, its latest acquisition, as well as expectations on contributions from its Battersea development.

Spin-off/listing  of  core  businesses.  In  terms  of  group  strategy, management  reiterated its  view  that  in  order to  grow  its  businesses, it continues  to  contemplate  various  options,  including  spinning  off/listing its  core  divisions.  The  first  would  be  Sime’s  motor  division,  as management is already in the midst of talking to investment bankers to list this unit  in Malaysia.  Another division which management is thinking of  listing/spinning  off  would  be  its  plantation  assets  in  Indonesia.  This move could come in the form of an IPO or a reverse takeover (RTO). W e believe  it  could potentially be in the form of a tie-up with an Indonesian partner  which  has  a  sizeable  plantation  landbank,  which  would  be injected into a listed entity.  In the  longer term, we believe management would also look to list/spin off its  other divisions.  We believe listing the property  division  is  likely  to  unlock  the  most  value,  given  the  vastness and location of Sime’s property landbank.

Contributions  from Sime’s iconic Battersea Power Station  will  start coming through in FY16/17  (Jun).  We  expect  a  pretax profit contribution of  MYR200m-300m  from  the  recognition  of  the  first  phase  of development.  As  we  estimate  its  associate  contribution  from  the Battersea project  to  positively impact earnings by 6-7% in FY16 and 12-13% in FY17, we have adjusted our earnings forecasts accordingly. 

Still  NEUTRAL.  We lift our SOP  TP  to MYR9.00 (from MYR8.75). We maintain  our  NEUTRAL  recommendation  on  the  stock.  Althoughearnings  prospects  remain  rather  subdued,  we  believe  news  flow surrounding  Sime  Darby’s  potential restructuring/demerger  proposals could provide some support to its share price.

No  shortage  of  questions  at  IMHK.  Sime  Darby  participated  in  our  IMHK conference  last week, represented by group president and CEO, Tan Sri Dato' Seri Mohd Bakke Salleh, as well as investor relations representatives Rafiza Ghazali and Benjamin  Poh.  Questions  abounded  about  the  group’s  strategy  going  forward,  in relation to spin-offs and listings of its core divisions, its latest acquisition, as well as expectations on contributions from its Battersea development.

Spin-offs/listings of core businesses starting with motor division...  In terms of group strategy, management reiterated its view that in order to grow its businesses, it continues  to  contemplate  various  options,  including  spin-offs/listings  of  its  core divisions.  The  first  off  the  bat  would  be  Sime’s  motor  division,  as  management  is already in the midst of talking to investment bankers to list this division in Malaysia. Management believes that as Sime is currently being valued on a SOP basis, with the  motor  division  being  accorded  a  P/E  of  9-11x,  should  the  listing  be  able  to command a slightly higher P/E of 13-14x, this would enhance its value to Sime. …possibly  followed  by  Indonesian  plantations.  Another  division  which management  may  consider  listing/spinning  off  would  be  its  Indonesian  plantation assets in Indonesia. This move  could come in the form of an IPO or an RTO.  We
believe  the  RTO  could  potentially  be  in  the  form  of  a  tie-up  with  an  Indonesian partner which  has  a  sizeable plantation landbank that  would be injected into a listed entity.  This  would  help  the  company,  as  the  Indonesian  Government  has  limited ownership by foreign companies to no more than 100,000ha of plantation landbank per company, as this ruling is not applicable to listed entities (presumably listed in Indonesia).  A  listing  on  the  Indonesian  exchange  would  also  bode  well  for  Sime should  the  Indonesian  Government  tighten  regulations  with  regards  to  the  foreign ownership of land. 

Long-term plan to unlock value. In the longer term, we believe management would also look to list/spin off its other divisions. We believe listing the property division is likely  to  unlock  the  most  value,  given  the  vastness  and  locality  of  Sime’s  property landbank. However, this listing could be the jewel in the crown that Sime is saving for last. At the end of these exercises, Sime Darby could  end up being more of a holding company, as it intends to maintain at least a 51% stake in all its businesses.

New landbank acquisition. Questions were also asked about Sime’s latest proposal to acquire New Britain Palm Oil (NBPO LN,  NR) and the perceived premium pricing it is offering to pay for it at  GBP7.15/share. Management reiterated its stance that it is in the plantation  business for the long term, and that good-quality sizeable  landbank like that owned by New Britain Palm Oil   (79,884ha of planted palm oil land,  average age of 10.8 years) is hard to come by. Assuming this acquisition goes through, Sime would  increase  its  total  agricultural  landbank  to  close  to  1m  ha  (998,752ha).  We estimate this proposed acquisition would be earnings-accretive for Sime, which could increase its net earnings by 3-4% per annum.  

Industrial  division  facing  slowdown  from  Australia’s  mining  industry.  For  the industrial division,  although management  is cautious on prospects  for  the  next  two years  due  to  the  mining  industry  slowdown  in  Australia,  it  believes  longer-term prospects  are  still  positive  and  continues  to  push  for  expansion  of  its  distribution channels in Australia and China. Contributions from Battersea development to start coming through  from  FY16 or FY17.  For the  property division, Sime’s long-term goal is for its overseas division to contribute 20% to total profit (from 5% currently). This can be achieved once its contributions  from  its  iconic  Battersea  Power  Station  starts  coming  through  fromFY2016  or  FY2017.  We  expect  profit  contribution  of  MYR200m-300m  from  the recognition  of  the  first  phase  of  development.  Recall  that  the  first  phase  of development involved a gross sales value (GSV) of GBP763m, selling for an average of GBP1,100psf. The take-up rate for the first phase was 99%. The second  phase of development,  at  the  Battersea  Power  Station  itself,  was  recently  launched  and garnered  a  sales  take-up  rate  of  95%.  Total  GDV  for  the  second  phase  was GBP1.65bn, at a higher selling price of GBP2,300psf. This phase of development will be completed in 2017. The third phase of development will be launched in Oct 2014, and has an estimated GDV of GBP1.9bn. As we have yet to factor this into earnings, we are imputing this into our earnings forecasts  now. We estimate Sime’s associate contribution from the Battersea development would positively impact earnings by 6 -7% in FY16 and 12-13% in FY17. 

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
Earnings forecasts increase. We have adjusted our earnings forecasts to take into account Sime’s associate contributions from its 40%-owned Battersea development project. Our forecast for FY16 was raised by 6.7%, while our forecast for FY17 was raised by 12.6%. We highlight that we will only impute in its  proposed  New Britain Palm  Oil  acquisition  once  it  has  been  completed.  We  maintain  our  CPO  price assumptions  of  MYR2,450/tonne  for  FY15  and  MYR2,500/tonne  for  FY16.  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,  our  SOP-based  TP  is  adjusted  up  to MYR9.00  (from  MYR8.75).  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 company’s share price.

Source: RHB