Sime Darby - 2QFY11 results in line

Sime Darby
2QFY11 results in line

• Sime booked 2QFY11 earnings of RM877.1m – in line

• Wet weather affected plantations and industrials operations during the quarter

• Stronger 2HFY11 expected, led by property launches, Hyundai & BMW sales, recovery in industrial and plantations in 4QFY11

• 8 sen DPS declared.
Buy for 13% upside 2QFY11 earnings in line. Sime booked 2QFY11 earnings of RM877.1m (+34% q-o-q; +105% y-o-y). This brought 1HFY11 net profit to RM1,531.8m (+37.7% y-o-y) – representing 47% of our full year estimate. We expect higher earnings contribution in 2H11, back-loaded to 4QFY11.

Plantations contribution higher despite wet weather.
Heavy rainfall in 2QFY11 had flooded some of the group’s estates in Kalimantan, Sabah, Sarawak, and Perak. Strong CPO prices however, helped to mitigate the lower volumes to boost 2QFY11 EBIT contribution to RM827.4m from RM492.7m in 1QFY11. Sime is likely spend time and money to repair some of the affected infrastructure in 3QFY11 during which time, FFB production is expected to decline further. We expect group FY11 FFB production to decline 4.5% y-o-y even after taking into account seasonal recovery in 4QFY11.

Expect boost from Property and Motor in 3QFY11, partly offset by Industrial and Plantations.
Sime expects to launch 15 new property projects in 2HFY11 with total GDV of RM1.6bn. Demand for Hyundai and BMW cars, on the other hand, are also expected to fuel growth in Motor division in 2HFY11. Recent flooding and Cyclone Yasi in Australia had delayed revenue recognition in the industrial segment. However, reconstruction work is expected drive additional demand for repair & maintenance in 3QFY10. Plantations segment’s 3QFY11 profit should also ease q-o-q on seasonally lower volume, offset by slightly by higher prices. This will be followed by yield recovery in 4QFY11.

Buy call reiterated.
Sime is confident of winning its case against the recently lodged lawsuit in Abu Dhabi. We reiterate our Buy call on the stock as we believe near term growth
remains intact, albeit with temporary slowdown in 3QFY11.

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