Sime Darby Bhd
(April 8, RM9.30)
Maintain buy with target price of RM10.26: Sime Darby has proposed to sell its Malaysian power business, Port Dickson Power Bhd (PDP), to Malakoff Corp Bhd for a cash consideration of RM300 million, translating into RM0.92 million per megawatt (mw). Sime Darby still has two other power plants in Thailand.

On a megawatt basis, the proposed disposal is priced lower than the transaction by 1Malaysia Development Bhd (1MDB). In 2012, 1MDB bought Genting Bhd’s domestic energy options for RM2.3 billion. This translated into RM3.2 million per megawatt.

PDP is a 75%-owned subsidiary of Sime Darby Energy Sdn Bhd and operates the 440mw gas-fired open cycle power plant in Tanjung Gemok, Port Dickson, Negeri Sembilan. The plant supplies electricity to Tenaga Nasional Bhd under a 21-year power purchase agreement (PPA), which expires in January 2016.

For financial year 2013 ended June 30 (FY13), PDP recorded profit after tax (PAT) of RM77.3 million and accounted for 1.9% of the group’s PAT in FY13.

The proposed disposal is in line with Sime Darby’s long-term strategy to be a leader in its five core businesses comprising plantations, industrial equipment, motors, property, and energy and utilities.

The disposal is to be completed by June 30, 2014. Upon the completion of the disposal, Sime Darby is expected to recognise an estimated net gain on disposal of RM56.3 million. This translates into an increase in our 2014 earnings per share forecast of 1.8%.

We reiterate our “buy” call on Sime Darby with unchanged target price RM10.26, derived from its sum-of-parts valuation. — MIDF Research, April 8

This article first appeared in The Edge Financial Daily, on April 9, 2014.