• Improved results from the Plantation, Property, Motor, Healthcare and Other divisions mitigated the decline in Industrial division profit and the harrowing losses from E&U division.
• The E&U division underwent aggressive ‘kitchen-sinking’ exercise hence we expect no more significant negative surprises going forward.
• The mean PER of Sime Darby is 18.7x. Thus based on that empirical measure we arrived at a target price of RM8.40. We thereby reiterate our Neutral recommendation on the stock with a reduced target price of RM8.40 or FY11 PER of 18.7x.
Sime Darby’s net earnings of RM804.2 million in 9M10 was 38.0% lower when compared to RM1,296.1 million recorded in earlier year corresponding period.
The shortfall was mainly due to the hefty provisions by its Energy & Utilities (E&U) division despite the better performance from all other divisions except Industrial which reported a lower profit. Please refer to our Equity Beat titled “Sime Darby: Skeletons emerge from the Energy & Utilities’ closet”, dated 15 May 2010, for our commentary on the RM964 million write-offs incurred by the E&U division.
Higher Plantation profit from better upstream and turnaround in downstream operations. The Plantation division operating profit improved to RM1,705.5 million in 9M10, an increase of 45.0% as compared to RM1,175.9 registered in the same period last year mainly due to higher FFB production, higher average CPO selling price and improved results from downstream operations. Overall FFB production rose 3.0% in 9M10 to 7.59 million tones from 7.38 million tones in 9M09.
The FFB production in Indonesia jumped 23.0% to 2.56 million tonnes due to the higher matured hectarage and improved yield. However, the FFB production in Malaysia declined by 5.0% to 5.03 million tonnes due to replanting and unfavourable weather. The average CPO selling price rose 7.1% to RM2,277/mt in 9M10 as compared to RM2,127/mt during the previous year corresponding period. In addition, the downstream operations reverted back to profitability due to lower feedstock costs.
Higher Property profit from market recovery and gain on disposal. The economic upturn has helped in the recovery of property market hence the improved performance of the Property division. It reported revenue of RM1,196.3 million for 9M10, a 33.9% increase from the corresponding period last year. Moreover, operating profit
increased by 69.4% to RM374.8 million from RM221.2 million recorded the same period last year. The higher profit was contributed by better performance from the Bukit Jelutong and Nilai Impian townships, as well as a RM37.5 million gain from the disposal of a subsidiary company.
Lower Industrial profit due lower demand for new equipment. Revenue from the Industrial division inched up by 0.7% in 9M10 to RM5,960.3 million from RM5,918.9 million a year earlier. Nevertheless, operating profit declined by 15.3% to RM536.7 million from RM634.0 million in the same period last year.
The lower profit figure was due to lower demand for new equipment in Singapore and Australia. However, this was partially moderated by the higher parts and services sales in Australia, higher equipment sales in China and a RM19.0 million gain from the disposal of a property in Malaysia.
Higher Motor profit driven by strong regional sales. The Motors division performed strongly in 9M10 with a 32.8% increase in revenue to RM7,069.4 million from RM3,321.9 million in the same period last year.
Operating profit (which includes a gain of RM27.7 million from the disposal of a property) increased by 71.3% in 9M10 to RM232.6 million from RM135.8 million in the prior year corresponding period. Better top and bottom line numbers were mainly driven by strong regional sales. Operations in New Zealand reported a positive result while losses in Australia narrowed as compared to the previous year.
E&U registered a huge loss…and the final figure may vary. The E&U division recorded 50.3% lower revenue to RM1,156.8 million from RM2,325.9 million in 9M09. The division recorded a loss of RM1,019.3 million in 9M10 vis-àvis a profit of RM96.1 million in the same earlier period.
The harrowing loss was in relation to the delays and cost overruns on four E&U projects. The projects were the Qatar Petroleum project, the Maersk Oil Qatar (MOQ) project, the Bakun hydroelectric dam project and a project on the construction of vessels for use in the MOQ project.
Negotiations with the clients of these projects on the claims are ongoing. Furthermore, Sime Darby also appointed independent technical consultants to review the estimated costs to completion for Bakun hydroelectric dam project and MOQ project hence the estimated loss on these projects may eventually vary.
Healthcare & Other recorded better overall performance. Healthcare & Others recorded a huge increase in operating profit to RM80.3 million in 9M10 from a mere RM4.2 million in 9M09 due to better overall performance from insurance, bedding and healthcare sectors, together with a gain on disposal of an associate amounting to RM3.8
Outlook. The prospect for the mainstay plantation business is positive as the outlook relating to FFB output is favorable due to the yields improvement of its Indonesian estates. We are also positive on the outlook of CPO prices in the medium-term due to the rising trend in general commodity prices. We restate our forecast of CPO prices for the calender years of 2010 and 2011, with mean prices of RM2,450/mt and RM2,650/mt respectively.
In addition, the economic recovery has provided the momentum for the property, motors and healthcare businesses which have shown improved performance in 9M10. The market condition for the industrial business however was weaker but is improving. The E&U division meanwhile underwent aggressive ‘kitchen-sinking’ exercise thus we expect no more significant negative surprises going forward despite the fact that the final tally of the announced write-offs may vary from the earlier estimates.
We maintain our Neutral recommendation with a reduced target price of RM8.40. The mean PER of Sime Darby is 18.7x (see PER Chart below). Hence based on that empirical measure we arrived at a target price of RM8.40. We thereby reiterate our Neutral recommendation on the stock with a reduced target price of RM8.40 or FY11 PER of 18.7x.
Production dropped in 3Q10 by -27.9%qoq and -4.7%yoy following exceptionally dry weather conditions in Malaysia & Indonesia. But expect sequential rise in the coming quarters due to cyclical upturn in yields.
Revenue & Earnings
Revenue declined QoQ in 3Q10 due to lower plantation output and it registered quarterly loss of -RM308.6m due to hefty provisions incurred by E&U division.
Margin turned negative in 3Q10 due to hefty provisions.
Mean PER of 18.7x.
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