KUALA LUMPUR: CIMB Equities Research is retaining its earnings forecasts, sum-of-parts target price of RM9.80 and Add call on Sime Darby.
It said on Tuesday it expects Sime’s share price to re-rate on its plans to separately list its plantation and property units and improving earnings prospects on better crude palm oil (CPO) and coal prices.
Key risks are lower fresh fruit bunches (FFB) output and lack of corporate actions to boost its valuations.
To recap, Sime Darby’s 1HFY6/17 core net profit (excluding one-off gains) grew 47% on-year, thanks to stronger performances from all divisions except industrial and logistics segments.
“Core net profit was broadly in line with our and market expectations even though it accounted for only 42% of our and 43% of consensus’ full-year numbers. This is because we expect higher plantation and contribution from its 40% stake in Battersea project to boost earnings in 2HFY6/17. As expected, an interim 6 sen dividend was declared,” it said.
CIMB Research said Sime Darby’s 2Q/1HFY6/17 core net profit grew 127%/47% on-year due mainly to stronger contributions from its plantation division and RM95mil maiden contribution from its 40% share of profit from the Battersea project.
On a quarter-on-quarter, 2QFY17 core net profit surged 159% thanks to better contribution from all except its property division. However, 2Q reported earnings grew by only 45% on-quarter due to the absence of RM196mil of one-offs in 1QFY6/17.
Plantation earnings before interest and tax (EBIT) jumped 108% on-quarter in 2QFY17 thanks to a 26.3% increase in FFB output and a 9% improvement in CPO average selling price to RM2,835 per tonne.
The key improvement in yields came from its Indonesia and PNG estates which reported a 63% and 38.1% on-quarter rise in output, respectively. The recovery in Malaysian estates was slower at 6.6% on-quarter.
“Sime’s plans to create three independent pure plays to be listed on Bursa Malaysia will involve an internal restructuring, followed by a share distribution exercise (demerger) of Sime’s entire holdings in Sime Darby Plantation
and Sime Darby Property, prior to the listing of these two entities.
“The exercise will not entail any public offering of shares or fund raising from shareholders but only a distribution of shares to entitled shareholders, proportionate to their shareholdings in Sime Darby.
“We are positive on its plan to create pure plays as it will help unlock value via better appreciation of its individual units, and the removal of the discount attached to its conglomerate structure.
“The risk of the proposal not going through due to market conditions is low as there are no plans to raise funds from the market. We believe that any potential value creation post demerger will depend on how well the individual units execute their growth strategies and improve efficiency,” said CIMB Research.
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