SEVEN years after the Synergy Drive merger that saw Guthrie and Golden Hope being folded into Sime Darby Bhd to create the world’s largest listed plantation company, it seems that analysts and investors are anxious to see the conglomerate float some of its smaller units.
Its market capitalisation has doubled from RM28 billion in 2007, just ahead of the merger, to some RM55 billion today. It made some notable acquisitions during this period, including its 40% stake in the iconic Battersea Power Station site. It also partnered Ramsay Health Care to expand into another consumer stronghold and sold its oil and gas business.
Now, investors are keeping watch on when Sime Darby will revive the planned spinoff of its motor unit that has been postponed to the second half of calendar year 2015. There’s also a second reason for investors keeping their eyes peeled — the conglomerate may once again be taking the lead in another mega merger to grow even bigger in the property business.
Just last month, following the release of its results for the first half of the financial year ending June 30, 2015, CIMB Research regional plantation analyst Ivy Ng, among other analysts, tells clients in a note that Sime Darby’s weaker earnings “are likely to be partially offset by potential acquisitions and the planned listing of certain key businesses”.
For FY2014 ended June 30, its motor business contributed 15% to earnings while real estate accounted for 14%. As the world’s third largest dealer of Caterpillar heavy machinery, Sime Darby’s industrial segment is also sizeable, accounting for some 24% of group profits.
Its core plantation business remains the group’s largest earnings contributor at 45% last year and it was not too long ago that its strength helped keep the group profitable when some of its other businesses suffered losses.
For its latest 2Q numbers, however, Sime Darby’s plantation and industrial businesses — its two largest contributing core segments — recorded a 46% and 53% year-on-year slump in earnings before interest and tax.
Apart from Sime Darby posting its weakest industrial earnings since the 2008 merger and getting a lower average selling price for its crude palm oil (CPO) of RM2,154 per tonne for 1HFY2015, CIMB’s Ng also notes that Sime’s 2Q fresh fruit bunches (FFB) output fell 15% y-o-y in 2QFY15 and 6% in 1HFY2015 instead of growing 5% in line with management’s guidance. Sime Darby attributed this to poor weather, a shift in cropping patterns and higher planting activity. It now expects flattish FFB output for FY2015 and CPO prices to range between RM2,300 and RM2,500 per tonne between March and June this year. Experts at the recent Palm and Laurics Oil Conference 2015 in Kuala Lumpur projected prices to average between RM1,940 and RM2,500 per tonne for 2015, with the strength of demand for biodiesel being the most influential factor.
That’s still not too shabby given that Sime Darby president and group CEO Tan Sri Mohd Bakke Salleh says costs for large players like itself range from RM1,300 to RM1,500 per tonne. This puts gross margins at over 33% if CPO prices were to hover around RM2,000 per tonne.
“The cyclical nature of the industry is not something we are unfamiliar with. If you look at why prices move so rapidly, it comes down to basic demand and supply. Whatever the underlying causes — weather, disease, demand created by new markets like biodiesel — price is a factor of demand and supply. In the shorter term, current prices will affect higher-cost, less efficient and smaller players. In the longer term, the prices will find their equilibrium, as will the industry,” Bakke tells The Edge in an interview, pointing out that prices would find support from national policies such as Indonesia’s B15 and possibly B20 biodiesel blend.
“This will mop up a lot of supply from the world’s largest exporter of the oil for domestic consumption,” he says.
To be sure, the strength of Sime Darby’s balance sheet during the challenging time of lower CPO prices means that it is better positioned to be a purchaser should smaller operators throw in the towel. Yet, the verdict is split on whether Sime Darby paid a good price for its recently completed purchase of New Britain Palm Oil Ltd.
Sime Darby is also not yet on top of the game in some areas, perhaps due to its size. Analysts point out that smaller planters such as United Plantations Bhd achieve higher oil extraction rates (OER) and better FFB yield per hectare (yield/ha).
While Sime Darby’s group OER rose from 21.73% in 1HFY2014 to 21.8% in 1HFY2015, this is still below United Plantations’ 22.5% in FY2013 and 22.77% in FY2014. During the same period, United Plantations’ FFB yield/ha rose from 20.83 tonnes in 2013 to 21.4 tonnes in 2014. In its latest 1HFY15 earnings briefing, Sime Darby said its group FFB yield/ha fell in 1HFY2015, something which it attributed to higher replanting activity that resulted in the increase of immature hectarage, a shift in cropping trends, prolonged drought in the first half of 2014 as well as the impact of floods at the end of 2014.
These are all valid reasons but observers reckon more should be done to ensure that numbers from its plantations business are a lot better.
In this regard, Sime Darby has indeed come up with a game plan. Bakke says a number of measures have already been implemented to vigorously manage costs. “Even our capex has been reviewed and we have halved our budgeted capex from RM7.4 billion to RM3.7 billion for the year.”
“On the productivity and revenue side, whatever measures that are humanly possible are being worked on today — increasing revenue or ensuring we do not lose yields.”
Pending results in this area, analysts and investors are looking out for a non-plantation catalyst from the group to boost sentiment on the stock.
This article first appeared in The Edge Malaysia Weekly, on March 30 - April 5, 2015.
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