Sime Darby’s deep intrinsic value to be further crystallised

Sime Darby Bhd (Sept 29, RM9.02)

Maintain buy recommendation with an unchanged target price of RM9.96: There are some key highlights from Sime Darby Bhd’s early shareholders’ engagement on the listing of pure plays.

Sime Darby Plantation Bhd will focus on organic growth with targets to: improve fresh fruit bunch (FFB) yield and the oil extraction rate (to 25 tonnes per ha and 25% by financial year 2025 [FY25] from 19 tonnes per ha and 21.3% in FY17) and bring down production cost at the upstream division, which would be achieved by maintaining its aggressive replanting activities (5% to 7% of planted land bank per annum with higher yielding materials), improving on the irrigation system and higher mechanisation; and increase profit before interest and tax (PBIT) contribution from the downstream division (to 20% by FY25 from 5.2% in FY17) by focusing on differentiated, sustainable and traceable high-value products and increasing its presence in key geographical markets.

Sime Darby Property will focus on growing recurring income contribution (to 10% of its operating profits by FY22) by increasing its portfolio of income-generating assets (via joint ventures), developing its existing landbank along key growth areas and economic corridors, and expanding its overseas property development footprint (by leveraging on its involvement in the Battersea Power Station).

Sime Darby will focus on motor and industrial businesses — which collectively accounted for 94% of its PBIT in FY17. It is worth noting that its industrial division’s earnings visibility has improved, evidenced by stabilising metallurgical coal prices, which have in turn resulted in a sharp increase in order book (from RM1.5 billion in June 2017 to RM2.2 billion in August 2017).

Post exercise, Sime Darby Plantation and Sime Darby Property will have dividend policies of a minimum 50% and 20% respectively. On the other hand, it is unclear if Sime Darby would maintain its current dividend policy of 50%.

Risks include a sharp fall in FFB output and/or palm product prices, prolonged weak demand for mining equipment and delays in property launches.

Our forecasts are maintained for now, pending releases of prospectuses and circulars (expected by end-October/early November).

We maintain our “buy” recommendation on Sime Darby, underpinned by its plan to spin off the plantation and property businesses, which would further crystallise Sime Darby’s deep intrinsic value. — HLIB Research, Sept 29

This article first appeared in The Edge Financial Daily, on Oct 2, 2017.

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