Sime Darby ripe for dividend play

  • Corporate News
  • Saturday, 25 Apr 2020

Sime Darby has negotiated with Tesco Plc to secure a better value for the Malaysian operation where the latter owns the remaining 70% interest. This indicates that Sime Darby is in no hurry to sell the assets.

TESCO Stores (Malaysia) Sdn Bhd was never a core business for Sime Darby Bhd. The disposal of its 30% stake to CP Group of Thailand for RM300mil may be small relative to Sime Darby’s market capitalisation of RM13.6bil.

Nevertheless, it is a sizeable deal amidst the Covid-19 pandemic that has cast a pall over financial markets.

The corporate exercise is also significant for a few other reasons.

It highlights the intrinsic value of Sime Darby, which is into its 110th year in business and has a slew of non-core businesses in its stable that has yet to be monetised.

Furthermore, Sime Darby has negotiated with Tesco Plc to secure a better value for the Malaysian operation where the latter owns the remaining 70% interest. This indicates that Sime Darby is in no hurry to sell the assets.

As revealed on Wednesday, the RM300mil figure in the final agreed terms with UK’s Tesco Plc is far higher than what analysts had previously anticipated. Sime Darby expects to make a net gain of RM270mil – or equivalent to four sen per share – from the stake sale to Thailand’s C.P Retail Development Company.

CGS-CIMB says it had expected the group to register a gain of around RM162mil (or 2 sen/share), based on the projected consideration value from Tesco Plc’s announcement on March 9.

Larger deal

Recall that a few years ago, Tesco Plc estimated the consideration amount for Tesco Malaysia to be about £100mil (RM540mil), based on its net asset value. Sime Darby’s 30% strake works out to RM162mil based on the TescoPlc’s estimated value, the research firm points out in a report.

The disposal is part of a larger deal between Tesco Plc and Thailand’s CP Group, which was signed last month to sell Tesco’s businesses in Thailand and Malaysia to CP for an enterprise value of US$10.6bil (RM46.27bil).

Analysts say the potential divestment is positive for Sime. In recent years, the hypermarket chain has been incurring losses due to intense competition from discount grocers and the growing e-commerce space.

Sime Darby bought into Tesco Malaysia in late 2001 and had been wanting to exit for some time already. According to AllianceDBS, the group had written down its entire investment in the hypermarket chain before the disposal due to losses over the years and understands there were no earnings recognised last year.

Non-core assets

As far as overall strategy goes, the disposal is part of Sime Darby’s ongoing efforts to rationalise and monetise its non-core assets.

The group’s core areas of focus are the automotive sector and heavy industrial machinery and equipment. Sime Darby also has a healthcare arm that it plans to grow.

Besides this, it has interest in logistics where it operates four ports in Shandong, China. Its other non-core assets include a 12% stake in property developer Eastern & Oriental Bhd, 3,561ha in the Malaysia Vision Valley in Negeri Sembilan as well as an insurance business.

In the financial year ended June 30,2019 (FY19), Sime Darby sold Weifang Sime Darby Water Management Co Ltd and Sime Darby Global Service Centre, as well as Fiat and Alfa Romeo in Australia.

Of the three Sime-listed entities – the other two being Sime Darby Property Bhd and Sime Darby Plantation Bhd – which emerged after the breakup of the previous conglomerate, Sime Darby is seen as a “winner” because of its intrinsic value.

Proponents of this view point out that Sime Darby is over-capitalised. So, a natural thing to do would be to monetise underperforming assets and return the money to shareholders, they say.

A Sime Darby spokesperson when asked whether the RM270mil proceeds may yield a special dividend, neither committed nor ruled out the possibility.

“All options remain open. Depending on the needs of the group, the proceeds would primarily be utilised for working capital requirements, repayment of short-term borrowings, and/or dividend payments to shareholders, ” the spokesperson tells StarBizweek via email.

The spokesperson says the group remains focused on delivering the best possible value to its shareholders, “be it for the short-term through dividends or long-term through reinvesting into the growth of the group.”

He reiterates, while the group will continue to monetise its non-core assets, it is “in no hurry to divest and will do so when the time and price is right.”

Assuming a 100% payout as special dividend, this would translate to around 4 sen per share or about 2% yield based on current share price, says AllianceDBS Research.

However, the research firm says with cash flows tighter given the slower economic activity triggered by Covid-19, it would not be surprised if a portion of the proceeds were retained to beef up the group’s cash levels.

However, some think that Sime Darby would be among the companies counted on for dividends under the PNB’s portfolio of listed companies.

Oil price crash

“With the oil price crash, PNB is staring at huge paper losses in the oil and gas stocks it has major stakes in. Meanwhile, weak commodity prices and the soft property market are clouding the prospects of Sime Darby Plantation and Sime Dary Property, respectively, ” said one trader.

The disposal of the Tesco Malaysia stake is slated to be completed in the second half of 2020, conditional upon the approval of the Domestic Trade and Consumer Affairs Ministry and the completion of the sale of Tesco Thailand to the CP group.

Any potential special dividends, CGS-CIMB reckons would likely take place in the financial year ending June 30 2021 (FY21).

In the wake of Covid-19, Sime Darby is prioritising resources to focus on its core business in the automotive and heavy machinery segments

According to the spokesperson, the group is examining all its operations and is looking at ways to minimise operating and capital expenditure where possible, to ensure cash is preserved.

Having exposure in different markets has certainly given the group an advantage in times of crisis.

“When China was impacted, we were able to rely on Australia and the remaining markets to support the group.

While China has recovered and the outbreak has spread to other regions, we can look to China to carry us in the short term, ” says the spokesperson.

He says the group’s China operations were impacted in January and February because of lockdowns in the country. Branches there have since re-opened and “business has been catching up”.

In Australia, its mining business continues to hold up well as mining is categorised as an essential industry there.

As for Malaysia, operations have been largely closed following the movement control order.

“But we are starting to see a return to activity, albeit at a reduced level, for both the motors and industrial divisions with approvals from the Ministry of International Trade and Industry. Nevertheless, Malaysia only contributes 15% of the group’s revenue, ” says the spokesperson.

China and Australia contributed about 40% and 30% to group revenue respectively in FY19, which was its first full year as a pure-play organisation.

In the first half ended Dec 31,2019 (1HFY20), the group made a core net profit of RM560mil on a revenue of RM19.6bil. Net gearing stood at 0.13 times as at end-December.

Shares of Sime Darby closed at RM2 on Friday, inching up 2 sen. Market cap was RM13.6bil, which is about 10% lower than the value it stood at the beginning of the year.

Considering that its major shareholders can do with a good dividend, Sime Darby cannot be ruled out from declaring a healthy payout from disposal of non-core assets. The only question is which of its long list of non-core assets would be sold next?

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