Review

• Sime Darby’s 1HFY17 results came in within expectations. Excluding forex gain of RM114mn, gain on currency swap contract (RM8mn), loss on commodity future contracts (RM86mn) and other non-core items, 1HFY17 core net profit stood at RM956mn (+65.1% YoY ), accounting for 46% and 43% of ours and consensus’ full year estimates.

• Reported net profit increased by 78.5% YoY to RM1,087mn, mainly underpinned by higher CPO prices, higher contribution from property division (Battersea’s maiden profit) and lower interest cost.

• Plantation: Despite lower FFB production (-10.2% YoY), 1HFY17 PBIT increased by 82.4% YoY to RM841mn, thanks to higher CPO price of RM2,739/tonne compared to RM2,076/tonne (+31.9% YoY) in 1HFY16. OER declined from 22.0% to 21.3%. The lower FFB production was mainly due to lingering effects of El-Nino and reduction in mature hectares (replanting exercise). The midstream and downstream operations also reported better profit (+17.5% YoY) of RM38mn due to higher sales volume coupled with higher selling prices and lower overhead costs.

• Industrial: This segment’s PBIT decreased by 21.5% to RM106mn, affected by lower demand for equipment in Singapore (mainly oil & gas and marine sectors). We believe intense competition and the weakening of Ringgit against USD also exacerbated the situation.

• Property: 1HFY17 PBIT increased by 65.2% YoY to RM309mn, attributable to the gain on the disposal of Eastern and Oriental Berhad (RM35mn) and Sime Darby Property (Alexandra) Pte Ltd (RM131mn) and the gain on compulsory acquisition of land of RM58mn. Excluding the disposal gains, the property development segment would have recorded a profit of RM85mn.

• Motor: PBIT improved by 15.2% to RM266mn due to higher contributions from Malaysia, China and New Zealand, and a gain from disposal of property in Hong Kong of RM30mn.

• An interim dividend of 6 sen/share has been declared for the quarter under review.

Proposes Internal Restructuring Ahead Of Listing

• In a separate announcement, Sime Darby announced that it is proposing a pure play strategy involving the creation of three standalone listed entities - plantation, property and trading & logistics sectors (refer to Figure 3)

• Upon the listings, Sime Darby Plantation and Sime Darby Property will undertake the current plantation and property businesses while Sime Darby to remain listed with the trading business comprising motors and industrial, logistics business, and other businesses including healthcare, insurance, retail and investments.

• An internal restructuring exercise will be undertaken involving i) restructuring of the borrowing of the group, ii) transferring of certain assets including land within the group; and iii) capitalization of intercompany loans.

• Upon completion of the proposed distribution, the entitled shareholders will hold directly such number of Sime Darby Plantation shares and Sime

Darby Property shares in the same proportion as their shareholdings in Sime Darby.

• According to Sime Darby, the benefits of the proposals including: i) better focus on capital management and growth strategies, ii) unlock value for entitled shareholders, enable greater investor choice, and iii) enhance investor awareness.

• The proposed listing would not involve any fun raising exercise or new shares.

• The proposed listing of Sime Darby Plantation and Sime Darby Property maybe implemented together or at different times

Highlights from Analysts’ Briefing:

• The listing of the two divisions is expected to take place by end of this year or early next year.

• Some land bank will be transferred to the Pure Play entities to fuel future development.

• There is no ‘right-size’ workforce plan at this juncture. However, management did not rule out the plan to ‘right-size’ its workforce once pure play units have been established.

• The group has been engaging with the credit rating agencies to determine the measures for improvements in their performance.

• Regarding the Carey Island port city project, management guided that the project is still at a very preliminary stage (concept level). The development of the port will involve parcel of land belong to the state government and some reclaim land from the sea. Meanwhile, Sime Darby will only look into the real estate play and supporting the port activities.

Impact

• No change to our earnings forecasts

Outlook

• As we mentioned in our previous reports, we are not overly positive on the listing. We have doubts whether the listings would add value to the group given its rich valuation as compared to other plantation companies.

• Management is concerned on the volatility and uncertain market condition, particularly in the US and the continued volatility in foreign exchange rates.

• Expecting higher contribution from the Plantation division, driven by the higher CPO and PK prices coupled with the higher contribution from midstream and downstream operations (largely attributable to expected higher sales volume and selling prices).

• Despite positive outlook on the Plantation division, management is still cautious on the Industrial and Motor segments.

Valuation

• We are upgrading Sime Darby TP to RM8.24 (previously RM7.45) as we have revised upward plantation PER to 24x from 21x previously in the SOP valuation. This is to reflect the expansion in plantation earnings. Meanwhile, Motor segment’s PER on the other hand also increased to 13x (10x previously) to be in line with industry peers. Sime Darby is currently trading at a lofty valuation of approximately 29x CY17 EPS versus its 5- year average rolling forward PER of 24x. The earnings growth has been priced in, in our view. Maintain SELL on Sime Darby

Source: TA Research - 28 Feb 2017