Malaysian palm oil futures fell for a fifth consecutive session on Wednesday, dragged down by surprise signs of improved output and weak export demand.
KUALA LUMPUR: An equity issue may be inevitable for Sime Darby if it wants to reduce its gross gearing from 58% now to an “ideal level” of 40%, said Affin Hwang Capital Research.
The research house said on Friday the gross gearing needed to be done in order for the group to maintain its credit rating.
Its largest shareholder, Permodalan Nasional Bhd (PNB), however, is reportedly not in favour of a massive rights issue to raise up to RM6bil, and instead wants the group to explore other options, including a placement of new shares.
“In our recent meeting, management reiterated that various options are still being considered by Sime’s board to lower the gross gearing of the group from 58% as at end-June 2015 to what the group considers to be the ideal level of 40%.
“We believe a rights issue may be unavoidable since the timing is still not favourable for the listing of core assets, and the disposal of non-core and selected investment assets is unlikely to raise the amount required to lower group gearing to 40%.
“Subject to final pricing, a private placement of new shares could be EPS-dilutive for existing shareholders,” it said in a note on Friday.
Affin Hwang Research added that the New Britain Palm Oil Ltd (NBPOL) acquisition would boost fresh fruit bunches (FFB) production by 1.5 million tonnes and lower the group’s average age of palm trees to 14 years and enhance EPS over time.
It added that that each RM100 tonne increase in CPO selling prices would add approximately RM188mil to Sime’s core net profit, or 3.0 sen to EPS.
“It however remains to be seen if CPO price averages will surpass forecasts.
“The impact of the ongoing strong El Nino on 2016-17E CPO production is still being assessed. The Industrial, Motors and Property divisions also continue to face challenges from lower commodity prices, slower economic growth and stiff competition in key markets as well as tighter lending rules and cautious spending post-GST potentially capping heavy equipment, motor and property sales,” it said.
The research house also said the first and second phases of the Battersea project were expected to be completed in mid-2016 and 1Q19 and expected to contribute significantly to group profit.
Affin Hwang Research maintained its FY16-18 forecast and 12-month target price of RM7.59 but downgraded its stock rating from Hold to Sell.
“Our FY17 forecasts include a lumpy RM220mil PBT contribution from its 40% stake in the Battersea project.
“As a KLCI heavyweight, SIME is a potential beneficiary of support when the RM20bil market stabilisation fund is set up by the government.
“The risks to its call, it said, were a stronger rebound in CPO and crude oil prices, and strong recoveries in global and regional economies, boosting demand for core products and services,” it said.
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