KUALA LUMPUR (April 23): Sime Darby Bhd’s plan to sell its 30% stake in Tesco Stores (Malaysia) Sdn Bhd for RM300 million is seen as positive by analysts who say this would allow the group to exit its loss-making hypermarket business.

Yesterday, Sime Darby said its wholly-owned subsidiaries Sime Darby Allied Products Bhd and Sime Darby Holdings Bhd had entered into conditional agreements with Tesco Holdings BV and Tesco plc as well as the buyer of the stake, CP Retail Development Company Ltd.

The disposal is part of a larger deal between Tesco plc and Thailand’s CP Group signed in March to sell Tesco’s businesses in Thailand and Malaysia to CP for an enterprise value of US$10.6 billion (RM46.27 billion).

“The potential divestment of Tesco Malaysia is a positive news for Sime as the hypermarket has been reporting continued losses since FY15 (financial year 2015) [except for FY18, likely due to one-off effects] due to intense competition from discount grocers and the growing e-commerce space as well as an increase in affluent customers.

“Sime has discontinued the recognition of its share of losses in Tesco Malaysia since FY17 as the group’s carrying value in the associate is nil. Furthermore, the deal is also in line with Sime’s plan to rationalise its non-core businesses in the long run,” Affin Hwang Capital analyst Brian Yeoh wrote in a note today.

Hong Leong Investment Bank (HLIB) agreed that the news is positive, in line with Sime Darby’s long-term strategy of disposing of its non-core assets while expanding its core segments of industrial equipment and motors.

The group is expected to record a RM270 million gain on disposal from the exercise, to be recognised in FY21.

“We do not discount the possibility of management distributing the disposal proceeds as a special dividend (up to 4.4 sen/share) for FY21,” HLIB analyst Daniel Wong said in a research note.

HLIB maintained its "buy" call with an unchanged target price of RM2.

“Despite the low net cash coverage holdings, we believe Sime Darby will be able to weather through the difficulties in CY20 (calendar year 2020) as the group has a strong balance sheet to access credit markets as well as strong support from major government-linked shareholders. Sime Darby is also the best proxy for a global economy recovery in CY21 with strong demand for industrial equipment from infrastructure stimulus plans (especially in China and Southeast Asia) and growth in Australia mining,” said Wong.

Affin Hwang Capital, on the other hand, maintained is "sell" rating and target price of RM1.50 as it remained cautious about the macro environment given the Covid-19 outbreak.

As at 11.40am, Sime Darby shares were up 11 sen at RM1.97 with 6.98 million shares traded, with a market capitalisation of RM13.13 billion.

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