Sime needs to float individual divisions to extract value

About 60% of Sime’s earnings come from its plantation division.

AFTER some years of vacillating whether to unlock value of the divisions in Sime Darby Bhd, signs do indicate that strategy in on the cards again.

The premise of such a move will see Sime Darby raise a significant amount of money and improve accountability and efficiency of its divisions and businesses should it undertake such corporate manoeuvres but some quarters argue whether that move will be in the interest of the conglomarate.

“It can be the right step but it all boils to valuations,” says one analyst who tracks the stock.

Since being listed in November 2007 as the new Sime Darby after the consolidation exercise involving companies such as Kumpulan Guthrie Bhd and Golden Hope Plantations Bhd, Sime Darby’s market capitalisation has not exceeded the valuation post listing.

Many will see the decline in the market capitalisation as a sign that the entire consolidation exercise has not built value for Sime Darby. Others argue that the problems stems from its oil and gas division where big losses soured sentiment surrounding Sime Darby up to the point when that business was disposed off for RM695mil in 2011.

Analysts say that growing Sime Darby’s earnings and its market capitalisation is a target of president and group chief executive Tan Sri Mohd Bakke Salleh.

“He wants to grow the company and unlock value of its divisions,” says one analyst.

What’s holding back value?

One problem with the current situation, analysts feel, is that Sime Darby, with about 60% of its earnings coming from its gargantuan plantation division, is being penalised somewhat for being a conglomerate.

Investors are paying higher valuations for pure play plantation companies rather than Sime Darby. As a comparison, shares of IOI Corp Bhd and Kuala Lumpur Kepong Bhd trade at a forward price to earnings ratios of 21.99 and 21.04 times, compared with Sime Darby’s 18.9 times.

“Investors generally want exposure to a certain type of industry and therefore companies such as IOI and KLK attract higher valuation. The risk with a conglomerate such as Sime Darby is associated with its other divisions and that’s holding back its valuations,” says one analyst.

“If Sime Darby indeeds goes for a break-up, then it will be easier to value Sime Darby shares as investors can know each core segment better.”

Those who back the idea of breaking up Sime Darby say the easiest way to extract best value will be to float its non-plantation divisions. By doing so, Sime Darby will be increasingly plantations focused and that shoud drive valuations upwards towards what its plantation peers are trading at.

Some say the fastest way will be to list its plantations. That strategy might be the hardest to execute as plantations has been the foundation of Sime Darby and was parked under the parent company in the past even prior to the Synergy Drive consolidation exercise which created the larger Sime Darby of today.

Those who feel Sime Darby should not proceed with the break-up of the conglomerate say there is value for conglomerates. They point to Sime Darby’s valuations, although lower than that of the larger plantation companies, is higher than property and motor stocks on Bursa Malaysia in which it has businesses in.

“Sime Darby shouldn’t be valued any less as a conglomerate. Being a conglomerate means there is a bigger market capitalisation and hence better liquidity.”

Analysts also say that should Sime Darby list its property or auto business, the valuations of such businesses will be below that of the company now.

“The sum of parts valuations of Sime Darby will be about the same should it break-up the company,” says an analyst.

Another benefit of keeping the status quo is that Sime Darby can leverage off its balance sheet. Analysts feel the group’s gearing is low and has ample room to take on more debt onto its balance sheet to grow.

Sime Darby has raised quite a kitty this year after selling of some assets. The RM1.38bil raised will allow it to fund its bid for a 49% stake in New Britain Palm Oil Ltd.

Analysts say the acquisition of New Britain Palm Oil will help mitigate the aging profile of its plantations. It also will display a new appetite for Sime Darby to add value to the group without breaking up the conglomerate.

Timing the spinoffs

It’s been reported that Sime Darby is looking to acquire a Reit and float its motor division. Sime Darby’s property division has development projects in Malaysia, Singapore, Australia, Britain and Vietnam and acquiring a Reit would enable the group to unlock the properties that it has.

The group is also looking at a listing of its motor business that according to reports could raise as much as US$500mil (RM1.59bil).

Analysts argue that the key to unlocking value will be the timing of a floatation.

“A listing doesn’t necessarily bring in value to the group. It could end of diluting the valuation of the parent.”

Furthermore, a listing of its motor division will see that company being dictated by the trends in auto demand in China and Hong Kong given the exposure of its motor business in that part of the world.

“Investors might not even give that division full value if listed in Malaysia as the bulk of its income is generated not from within Malaysia,” says an analyst.

Analysts say that Sime Darby is structured like a holding company with different subsidiaires as each division has its own board of directors that dictate what the business will do.

It will be debated whether a listing will add accountability and make those divisions more efficient in its operations as the group is already showing plenty of appetitie for growth.

Its capital expenditure is said to be between RM4bil and RM5bil a year and the company has shown interest in growing its businesses under the current structure and management.

“They have the resources to grow even without breaking-up. But the additions it makes to its business might not move the stock as it is a big group,” says an analyst.

Related story:

Analysing the divisions

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Business , sime darby , unlock , value , divisions


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