Sime Darby faces potential dilution of 3.1% in EPS

Sime Darby Bhd (Sept 8, RM7.86)

Maintain sell call with a lower target price (TP) of RM7.03: We maintain our financial year ending June 30, 2017 (FY17) to FY19 core net profit forecasts pending the completion of the proposed private placement (PP) and final issue price of the placement shares in the fourth quarter of 2016.

We slightly lower our net earnings per share (EPS) forecasts and TP after incorporating the end-FY16 issued share capital of 6.33 billion shares.

A proposed PP through a book-building process and a maximum discount of 5% to the volume-weighted average price is to repay borrowings, fund capital expenditure and strengthen the group’s shareholder funds.

The proposed PP is expected to cut group gross gearing from 0.44 times as at end-FY16 to 0.38 times, and fall further towards the target level of 0.30 times after the completion of more asset disposals and the retention of profit.

Based on the indicative price of RM7.51 and an interest rate of 3.4% on borrowings, we see a potential EPS dilution of 3.1% after the proposed PP enlarges the issued share capital of Sime Darby Bhd to 6.64 billion shares.

The potential EPS dilution can be offset by a higher crude palm oil average selling price (unless negated by lower production), or contributions from the other core divisions.

But the impending placement of new shares at a discount to the market price is likely to cap the upside for a stock already trading at an overvalued level.  — Affin Hwang Capital, Sept 8

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This article first appeared in The Edge Financial Daily, on Sept 9, 2016. Subscribe to The Edge Financial Daily here.