What’s in the News?

Over the weekend, The Edge Weekly quoted unnamed sources and reported that Sime Darby has hired investment banks to work on an initial public offering (IPO) for its plantation business. However, it is not immediately clear what sort of valuation is being looked at internally for Sime Darby Plantation. The IPO is rumoured to take place in the 2H of this year. The article did not disclose any further details on the potential IPO.

Our Take on the News

We are not surprised by this news as the group has been considering various options to reduce its gearing level and strengthen the balance sheet. Furthermore, it makes more sense to list its plantation assets when the CPO price trades above RM3,000/tonne to maximise its IPO value, in our opinion. However, we have doubts whether the IPO exercise would add value to the group given its rich valuation as compared to other plantation companies. Sime Darby is currently trading at a lofty valuation of approximately 25x CY17 EPS versus our target PE of 23x for the plantation sector. According to Sime Darby’s FY16 annual report, the plantation assets are valued at RM26.7bn and contribute to approximately RM1.0bn or 34% of the group’s total PBIT. Moreover, separating the plantation division may increase downside risk for non-plantation segments with slowing earnings growth. These segments could see a potential P/E de-rating post the plantation IPO. In other words, we believe the breakup value of Sime Darby would be lower than what it is currently trading at now, hence we are not overly positive on the news, at this juncture.

Valuation

More updates once IPO details are available. Maintain SELL on Sime Darby with an unchanged target price of RM7.45, based on Sum-of-Parts (SOP) valuation method. We do not see any major re-rating catalysts on Sime Darby in the immediate term and our target price, which implies a CY17 PER of 21.8x, has largely priced in the potential earnings growth for FY17-18.

Source: TA Research - 23 Jan 2017