We maintain BUY on Sime Darby with a lower SOP-derived fair value (FV) of RM2.88 (from RM2.90), after updating for Weifang Port exit based on disposal proceeds and rolling forward our valuation base year to FY23F, from CY22 (Exhibit 1). Our FV implies 16x PE based on FY23F EPS. We revise our FY23F–24F earnings downwards by 1% after stripping out Weifang Port’s earnings contribution.
Sime Darby announced that it has entered into 7 share sale agreements with SPG Bohaiwan Port Group Company to divest its entire equity interest in the Weifang Port companies (Exhibit 2) for a cash consideration of RM1.27bil (RMB1.92bil).
In addition to the disposal consideration, the group will receive an indicative sum of RM357mil (RMB549mil) as repayment of shareholder loans. Net of transaction costs, Sime Darby is expected to pocket total proceeds of RM1.57bil from the disposal. The proceeds will be utilised for future capital expenditure and repayment of borrowings.
After accounting for a potential impairment of RM60– 70mil and foreign exchange gain of RM132mil, Sime Darby will record a net gain of RM35mil from the disposal. As the exercise is expected to be completed by 4QCY22, the earnings contribution from the operation will be deconsolidated starting 3QFY23.
Valuation-wise, the RM1.27bil consideration implies 1x P/BV as at March 2022, which we deemed as fair. A similar valuation of 1x PB was ascribed when the group disposed of Jining Port companies in December 2020.
We are generally neutral on this exercise. The divestment of the Weifang Port business is not unexpected and in line with Sime Darby’s portfolio rebalancing efforts. The group has been monetising its non-core assets and will reallocate the proceeds by reinvesting in its core businesses i.e. the motors and industrial divisions for higher returns on investment.
The stock currently trades at an attractive FY23F PE of 12x vs. its 4-year average of 17x with a decent dividend yield of 4%. We continue to like the company given that it is one of the beneficiaries of the rally in commodity prices and the pick-up in economic activities will likely benefit Sime Darby’s industrial and motors divisions.
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