JUST one month into 2017 and Sime Darby Bhd shares stood out, rising 10% to close at RM8.91 apiece last Tuesday. That outstrips the benchmark FBM KLCI’s 1.8% rise from end-December to end-January.
The rally is driven by renewed expectations of an eventual Sime Darby Bhd demerger, plans for which the group finally announced on Jan 26. It is seeking to spin off the plantation and property divisions while keeping its other three core businesses under the current listed entity.
The stock soared to close at a nine-year high of RM9.27 apiece the next day, a level unseen since January 2008. Meanwhile, its investment bank-issued structural warrant, Sime-C8, jumped six sen or 24.5% to 30.5 sen on the same day. The warrant closed at 28 sen last Tuesday.
Out of Sime Darby’s six outstanding warrants, C8 is the cheapest bet on a value-enhancing demerger with the smallest premium to the mother share. It has the second longest expiry date — July 31, 2017 — with a 5:1 conversion ratio and RM7.75 strike price.
Analysts had 10 “buy” calls versus eight “hold” and three “sell” ratings, according to Bloomberg data at the time of writing. Among the “buy” calls, target prices ranged from JP Morgan’s RM9 to KAF’s RM10. Out of 21 calls, 17 were last updated last month.
Many analysts are positive on the plantation spin-off, as the sector is seen to be heading for better times ahead.
In a Jan 26 research note, JP Morgan says it expects the plantation sector’s earnings to recover moving forward, and that Sime Darby Plantation’s asset valuations are discounted by as much as 45% to its closest large-cap peers. UOB Kay Hian previously estimated the plantation unit could fetch a valuation of over RM50 billion, more than four-fifths of Sime Darby’s market capitalisation, or RM60.6 billion.
If the stock rebounds to RM9, the C8 warrant would theoretically be worth 25 sen apiece. At RM9.15 per mother share, the warrant would then cost nothing in theory, with potential upside of 9.3% if the stock rises further to RM10.
However, the lifespan of the derivatives is rather short for investors to ride the upside that could result from the conglomerate’s plan, which explains the minimum premium over the mother share.
Sime Darby will release its earnings for the second quarter FY2017 ended Dec 31 this month. It pays dividends twice a year, with a policy of paying out at least 50% of net profit. This is unlikely to change as long as Permodalan Nasional Bhd remains a majority shareholder.
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