Sime Darby Bhd
(Feb 27, RM9.33)
Maintain neutral call with a lower target price (TP) of RM8.50: Sime Darby’s (Sime)’s six-month period of financial year ending June 30, 2015 (6MFY15) results were disappointing, due to weaker plantation and heavy equipment earnings. We maintain “neutral”, with a TP of RM8.50 (9.3% downside). As we believe this could be the first year Sime does not meet its key performance indicators profit target of RM2.5 billion, we reduce our forecasts to reflect this. Nevertheless, news flow surrounding its demerger or restructuring plans could still provide support to its share price. 

Sime’s 6MFY15 core earnings were below expectations at 34% and 31% of our and consensus FY15 forecasts (F). The main variances were lower-than-expected fresh fruit bunch (FFB) production growth of -6.4% in 6MFY15 (versus our projected +3.7% for FY15), a lower price of crude palm oil achieved at RM2,154 per tonne in 6MFY15 (versus our RM2,450 per tonne projection), weaker-than-expected earnings at the heavy equipment and motor units, and some marketing expenses incurred for its Battersea property project. It booked a net exceptional gain of RM3 million in the second quarter of FY15 (2QFY15), comprising a gain of RM21 million from a sale of a wave breaker in Weifang, China to a joint venture company, and a restructuring expense of RM18 million for its downstream operations. Sime declared an interim net dividend per share  of six sen. 

Key briefing takeaways: It is cutting its FFB production growth target to 0 from 5% for FY15, the management is rejigging targets for the heavy equipment unit, given the bleak profit contribution, the property unit is still holding up well in 6MFY15, and an update on the acquisition of New Britain Palm Oil Ltd (NBPOL) was given. 

Lower earnings are expected, moving forward. We cut our earnings for FY15F by 10.3% and for FY16F to FY17F by 2% to 3%, after imputing weaker contributions from the heavy equipment and motor unit, as well as trimming our FFB production target for FY15 to -2% (from +3.7%), while maintaining our 3% to 4% growth rate for FY16F to FY17F. We highlight that we will only impute its proposed NBPOL acquisition once completed, which is likely to be by March. This proposed acquisition would be earnings-accretive for Sime, potentially adding 3% to 4% per annum to its net earnings. 

We adjust down our sum-of-parts-based TP to RM8.50 (RM8.75) but keep our “neutral” recommendation on the stock. Although its earnings prospects remain rather subdued, we believe news flow surrounding Sime’s potential restructuring or demerger proposals could provide some support to the company’s share price. — RHB Research, Feb 27

This article first appeared in The Edge Financial Daily, on March 2, 2015.