Sime Darby Bhd (Inter-Pacific Research) neutral; target price RM8.63

Developing sustaining future
Hightlight

• NEUTRAL: Our target price of RM8.63 using SOP has an upside of 10.2% from its current price of RM7.83. Although Sime’s current debacle has dented investors’ confidence, we think the measures being taken by the management would eventually put a lid on its downside risk, suggesting room for re-rating in the future. For now we are recommending NEUTRAL.

• Lower than expected: Sime’s annualized 3QFY10 PBT of RM2.23bn is 14.2% and 28.9% lower than ours and market’s expectation respectively. Our higher PBT of RM2.67bn comes about after taking into consideration the RM964mn provision losses in 3QFY10.

• Higher revenue, lower PBT: Sime’s 9MFY10 revenue of RM23.74bn or up 1.1%y/y comes from stronger contribution from its property segment (+33.9% y/y); motor sales (+32.8% y/y) and slight improvement in the industrial segment (+0.7%). But the higher revenue however was not translated into their 9MFY10 PBT which fell by 12.6%y/y to RM1.72bn. This is because their energy and utilities (E&U) business posted a loss of RM569.8mn in 9MFY10.



• Boosted plantation profit: 9MFY10 plantation operation recorded a profit growth of 36.4% y/y minus ex-associated and 45.0%y/y plus associate contribution. The higher y/y profit was due to (1) better FFB production; (2) higher average CPO selling price of RM2277/MT or up 7.1%y/y; and (3) improved midstream and downstream profit of RM141mn vis-à-vis a loss of RM116mn in 9MFY09.

• FFB production improved in Indonesia: Total FFB production in 9MFY10 improved by 2.8%y/y to 7.595mn MT emanating from Indonesia’s FFB yield per mature hectare growth of 2.3 MT/ha that outperformed Malaysia’s FFB yield which fell by 0.7 MT/ha to 16.9MT/ha. Malaysia’s 9MFY10 CPO production fell by 2.5% y/y to 1.13mn MT dragged by 5.1%y/y frop in FFB production to 5.03mn MT in 9MFY10. But the drop was cushioned by a 0.4ppt y/y improvement in the OER yield to 21.3%. As for Indonesia, 9MFY10 CPO production grew by 24.3% y/y to 0.68mn MT arising from FFB production growth of 23.3% y/y and 0.7ppt improvement in OER yield to 23.1%.

• Property segment margin improved: Property segment margin improved to 28.4% in 9MFY10 (21.0% in 9MFY09) was due to better take-up rates from the sales of their higher price residential and commercial properties. 3QFY10 PBT from property division rose by 59.7% q/q and 120.3% y/y to RM183.3mn.

• Industrial and motors: 9MFY10 profit from industrial activities fell by 14.8%y/y following the decline in revenue from SEA ex-Malaysia and Australasia. But 9MFY10 profits from motor improved by 65.7% y/y on the back of stronger result coming from all the regions.

• E&U losses provision: The E&U division YTD loss provision of RM1.33bn from 4 of its current projects i.e. Qatar Petroleum project, Maersk Oil Qatar project, Marine project and Bakun project impacted Sime’s 9MFY10 bottom line. Out of the RM1.33bn provision, about RM964mn was accounted for in 3QFY10. Thus, 3QFY10 reported a loss of RM308.6mn. The 4 projects in total amounts to al loss of RM1.7bn.

• Bakun project provision on Sime portion alone: Management indicated that the RM450mn provision for the Bakun project is for their 35% JV. Potential loss would amount to RM1.29bn for the whole project. Management pointed out that additional provisions were included in the RM450mn to avoid any further extra provision. We were brought to understand that there will be technical personnel to confirm and reaffirm the provision losses.

• Dent in confidence: The recent E&U debacle saw loss of investor confidence and raised the eyebrows on corporate governance. Recognizing the current ongoing review of other business segments, there has been changes in the management level for better detection of ‘ability’ and ‘accountability’. While the E&U issue has dented investor’s confidence, Sime should come out stronger from this experience by having a stronger and more accountable management team.