Sime Darby’s Weifang disposal a positive

This article first appeared in The Edge Financial Daily, on July 4, 2018.
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Sime Darby Bhd
(July 3, RM2.35)
Maintain neutral with an unchanged target price (TP) of RM2.40:
Sime Darby Bhd announced that its indirect wholly-owned subsidiary, Sime Darby Overseas (HK) Ltd, had entered into a share purchase agreement with Shandong Water Environmental Protection Group Co Ltd (Shuifa) to divest its entire 100% equity interest in Weifang Sime Darby Water Management Co Ltd (WSDW) for a total cash consideration of US$68 million (RM275 million). We view the disposal price at 1.3 times WSDW’s book value as fair and in line with our expectations. We are positive on the disposal as it helps to further unlock the value of non-core assets within the group. Nevertheless, we make no adjustments to our earnings forecasts as the disposal will have a minimal impact (about 2%) on Sime Darby’s financial year ending June 30, 2019 forecast earnings.

WSDW is an indirect wholly-owned unit of Sime Darby. It owns and operates two water treatment plants in the Binhai Economic-Technological Development Area, adjacent to Weifang Port, in Shandong Province, China, and has a capacity of 51.1 million cubic metres per annum. Shuifa, meanwhile, is a wholly state-owned company in Shandong Province. Proceeds from the disposal are expected to be used to pare down borrowings and/or to fund the group’s operations. It is estimated to receive approximately RM65 million of net gain from the proposed disposal, which will be completed in the second half of 2018.

This news is not a surprise as management had earlier expressed its intention to monetise its non-core businesses. We had ascribed a one times price-to-book value in our sum-of-parts-based valuations. We view this disposal positively as it helps to realise the underlying value of non-core assets within the group as well as improve the group’s cash flow, while strengthening its balance sheet.

Despite the strong order book in its industrial segment due to improvements in mining and construction activities in Australia and China, we remain cautious about its motor segment, which continues to be impacted by strong competition and cautious consumer sentiment. We maintain our “neutral” call with a 12-month TP of RM2.40. Sime Darby is trading at a forward price-earnings ratio of 22 times, compared with an average of 19 times for its peers. — PublicInvest Research, July 3