Analysing the divisions


Sime Darby Bhd is a giant of a company but the bulk of its earnings comes from its plantation division.

Recent reports suggest a listing of its motor division is being contemplated and the group is also looking at extracting value from its property business.

Is the break-up of Sime Darby the right thing to do? Given its size and the businesses that it has, StarBizWeek looks at the prospects of Sime Darby’s most lucrative businesses.

Plantation

The potential breaking up of the Sime Darby conglomerate could possibly result in it becoming a pure plantation company, alongside rivals such as IOI Corp Bhd and Kuala Lumpur Kepong Bhd (KLK).

But analysts question the necessity of undertaking several corporate exercises when its supposed aim is to focus on its plantation business. “Why should it take four or five steps to get there, when it is simpler to just list its plantation division?” asks an analyst.

The analyst expressed surprise at the notion, adding that Sime Darby is not on a “super growth path”.

“If it is going for listing, the proceeds have to be well-utilised. Unless it has a big expansion plan, it will have to consider if there is investor appetite for its stock,” he says.

StarBiz reported recently that Sime Darby was one of four plantation companies short-listed to acquire a 49% slice in Papua New Guinea-based New Britain Palm Oil Ltd (NBPOL).

The other two known short-listed parties are Wilmar International Ltd and Felda Global Ventures Holdings Bhd, while the third party remained unknown.

It was reported that seven parties, including Indonesian companies Sinar Mas group and RGE Group, had expressed interest. However, KLK and IOI Corp reportedly did not submit bids, although the two expressed interest in NBPOL as well.

The potential demerger could unlock value for the plantation business, some analysts opine, although it may not necessarily raise value.

“It is probably good for Sime Darby because people have the idea that just because it is a conglomerate, the earnings from other divisions partially offsets the plantation division’s earnings. This is although the plantation division makes up the bulk of the group’s earnings,” an analyst says.

The plantation division currently trades at around 16 times the group’s forward earnings, trailing slightly behind pure plantation companies like IOI Corp and KLK, which are trading at above 20 times price-earnings.

“There won’t be a significant change in its valuations, but the real value will be the change in investor sentiment,” the analyst says.

The group had earlier indicated interest to list its Indonesian plantations on the Jakarta Stock Exchange under former president and group chief executive officer Datuk Seri Ahmad Zubir Murshid.

The company plans to meet its targeted net profit of RM2.8bil for the financial year ending June 30, on the back of the “resilient performance” from the plantation division.

According to its third quarter results announcement to Bursa Malaysia, the plantation division posted a pre-tax profit of RM454.8mil during the quarter, 10% higher than the RM413.2mil a year ago on the back of improvements in oil extraction rate and average crude palm oil price realised.

Property

It was only two weeks ago when speculation arose that Sime Darby was looking to inject its property assets into a real estate investment trust, in hopes of unlocking some RM1.4bil in the division.

Analysts say the speculated buyout of Axis Real Estate Investment Trust (Axis REIT) and its management firm by Sime Darby could be the fastest way to unlock the value of properties the latter owned.

Sime Darby confirmed that going into the Reit sector was one of its long-term goals.

This is similar to when Malaysian Resources Corp Bhd had proposed to inject its properties into Quill Capital Trust and its management company in a RM756mil deal in April.

Analysts were mixed on the potential of Sime Darby undertaking the exercise with Axis REIT, but some concurred that it would help unlock value of its property assets.

However, its move to sell 55ha of freehold land to property developer Eastern & Oriental Bhd (E&O) was seen positively.

“Apart from strengthening its balance sheet, we believe the entry of E&O will help enhance the combined branding and value of nearby developments in the City of Elmina located along the Guthrie Corridor Expressway,” say PublicInvest Research analysts in a note.

Only a few days ago, the company announced that its unlisted property arm, Sime Darby Property Bhd, was selling the land in Elmina West to E&O for RM239.8mil.

The deal would entail E&O developing the land into a “wellness and livable city”, with an estimated baseline gross development value (GDV) of RM1.5bil. As part of the agreement, Sime Darby would get a 20% share of the proceeds if the value exceeds the baseline GDV.

“We are positive on this sale as it enables Sime Darby to unlock the value of its landbank while keeping the option to enjoy the upside of the project should the GDV exceed RM1.54bil. Additionally, Sime Darby can still benefit through its 22% associate stake in E&O,” says Kenanga Research analyst Alan Lim.

The two parties signed a memorandum of agreement in September 2013 to facilitate negotiations.

Automotive

Sime Darby’s intention to list its automotive business is not a new notion. In fact, it was under former president and group CEO Datuk Seri Ahmad Zubir Murshid that plans to list the automotive business surfaced.

Ahmad Zubir had explored listing the Hong Kong and China motor operations on the Hong Kong Stock Exchange. News on the potential listing resurfaced this week after the media reported that Sime Darby had called for banks to pitch for a potential listing of its auto arm.

The potential initial public offering could raise as much as US$500mil (RM1.59bil) by year-end, reports said.

Industry experts are mixed on the possible listing of Sime Darby Motors, with some concerned over the kind of valuations the auto outfit could fetch.

“Can they get the high valuation they want? The auto division’s valuations are about 10 to 12 times forward earnings, and they are only distributors. Compared to auto manufacturers, their margins will tend to be much lower,” says an analyst.

Sime Darby Motors sells, distributes and assembles cars from 31 marques in Malaysia, Singapore, China, Hong Kong, Thailand, Macau, Australia and New Zealand. It sells over 80,000 vehicles annually.

Sime Darby had earlier said that it “constantly monitors and evaluates all available opportunities that will enhance shareholder value”.

A listing exercise is a part of its considerations towards this purpose.

The division posted a fall in its nine-month earnings to RM402.9mil from RM507.5mil a year earlier due to a decline in profits from the Singapore, Thailand, Australia and China/Hong Kong operations.

Sales stood at RM12.85bil, representing a profit margin of 3.14%.

The group said it was hit by changes in government legislation in Singapore, the economic slowdown in Australia and the current social unrest and political uncertainty in Thailand.

Also, contribution from the China/Hong Kong operations also fell marginally due to a lower profit from BMW.

Its Malaysian operations, however, continued to grow strongly, with higher contributions from Hyundai, Ford, Land Rover and the Hertz franchised car rental operations, Sime Darby had said in its third-quarter accounts.

“If they go to the market with these challenges in hand, it is unlikely that investors are going to pay a high premium for the stock,” says an analyst.

Other analysts say it is “probably” a good idea to unlock some divisions, but the question remains if the respective divisions would be able to stand on their own.

Industrial

With news of Sime Darby potentially demerging and becoming a pure plantation company, analysts question its rationale of possibly listing its industrial arm.

Its industrial arm, Sime Darby Industrial, is the world’s third largest Caterpillar dealer, with more than 140 branches in 10 countries in the Asia-Pacific region.

Although analysts have the general opinion that it could be a good time for Sime Darby to unlock some of its asset value, more detailed and careful studies need to be conducted before making a move.

They voiced concern that the industrial business, on its own, would lose valuations and premium from potentially not being included in the index, once separated from the conglomerate umbrella.

In its latest financial results announcement to Bursa Malaysia, the industrial division posted pre-tax profit of RM220.6mil for the third quarter ended March 31, 2014, 16% lower than the same quarter last year.

“The pre-tax profit of the Australasia operations reported a decline of 38% due to lower equipment sales and product support sales in the mining sector,” Sime Darby had said.

However, operations in Singapore and China/Hong Kong saw improvement, thanks to higher equipment deliveries in the marine and oil and gas sectors.

Its order book as at March 31 stood at RM2.6bil, compared with RM2.1bil as at Dec 31, 2013.

Sime Darby Industrial carries other heavy equipment brands including Bucyrus, Case New Holland, Kubota, Terberg, Jacobson, Perkins and Omega. It also offers other services such as sales of new machines, engines or used equipment, among others.

Related story:

Sime needs to float individual divisions to extract value

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