Stock Name: SIME
Company Name: SIME DARBY BHD
Research House: RHB
Sime Darby Bhd
(April 29, RM8.75)
Maintain outperform at RM8.76, with reduced target price of RM9.70: We had six key takeaways from our recent visit. They are slower fresh fruit bunch (FFB) production in Indonesia now, longer-term FFB growth sustainable, crude palm oil (CPO) price view unchanged, production costs to decline, but not as significantly as seen in the first half (1H) of the financial year ending June 30, 2010 (FY10), property division picking up speed and capital expenditure is higher than expected.
The management is now guiding for a decline in FFB production of from 5% to 7% year-on-year (y-o-y) for FY10 (versus the guidance of 5% to 8% y-o-y growth two months ago), caused by the weather conditions as well as tree stress seen recently at its Indonesian estates. Although this is lower than our projected FFB growth forecast of 6.1% y-o-y for FY10, we still believe there will be some growth in FFB production in FY10, albeit at a smaller amount, given the recovery in production seen in March 2010, of 21.2% month-on-month (m-o-m). We are revising our FFB production forecasts down to project a 1.8% y-o-y growth for FY10 (from 6.1% previously). For FY11 to FY12, we are now projecting FFB production growth of between 4.1% and 5.5% per annum (from 4.2% and 4.4% previously), on the back of yield improvements in Indonesia, assuming normal weather conditions.
In the longer term however, future growth should come from an increase in mature areas (as 10% of its planted landbank is immature) and an improvement in age profile (as 20% of its landbank is between four to eight years in age).
Our forecasts have been revised down by 2.8% to 6.4% per annum for FY10 to FY12, after reducing our FFB yield and production estimates, adjusting our new planting assumptions for those years based on management guidance, raising our sales projections for the property development division; and raising our capex assumptions.
Risks include a reversal in crude oil price trend resulting in reversal of CPO and other vegetable oils price trend, weather abnormalities, change in emphasis on implementing global biofuel mandates; and a slower-than-expected global economic recovery.
As an investment case, post-earnings revision and adjustment of some of the target price-to-earnings (PE) ratio valuations for Sime's other divisions, we reduce our sum-of-parts based fair value for Sime to RM9.70 (from RM9.85). We have raised our target PEs for the motor sector to 14 times calendar year 2010 (from 12 times previously), the energy & utilities sector to 16 times calendar year 2010 (from 15 times), the heavy equipment sector to 14 times calendar year 2010 (from 13.5 times) and the property sector to 14 times calendar year 2010 (from 13.5 times), to be in line with the recent upgrades in these sectors' target valuations.
Maintain outperform recommendation for Sime given its further upside potential from government linked company reforms, additional merger synergies and yield improvements from its Indonesian plantations. - RHB Research Institute, April 29
This article appeared in The Edge Financial Daily, April 30, 2010.
Company Name: SIME DARBY BHD
Research House: RHB
Sime Darby Bhd
(April 29, RM8.75)
Maintain outperform at RM8.76, with reduced target price of RM9.70: We had six key takeaways from our recent visit. They are slower fresh fruit bunch (FFB) production in Indonesia now, longer-term FFB growth sustainable, crude palm oil (CPO) price view unchanged, production costs to decline, but not as significantly as seen in the first half (1H) of the financial year ending June 30, 2010 (FY10), property division picking up speed and capital expenditure is higher than expected.
The management is now guiding for a decline in FFB production of from 5% to 7% year-on-year (y-o-y) for FY10 (versus the guidance of 5% to 8% y-o-y growth two months ago), caused by the weather conditions as well as tree stress seen recently at its Indonesian estates. Although this is lower than our projected FFB growth forecast of 6.1% y-o-y for FY10, we still believe there will be some growth in FFB production in FY10, albeit at a smaller amount, given the recovery in production seen in March 2010, of 21.2% month-on-month (m-o-m). We are revising our FFB production forecasts down to project a 1.8% y-o-y growth for FY10 (from 6.1% previously). For FY11 to FY12, we are now projecting FFB production growth of between 4.1% and 5.5% per annum (from 4.2% and 4.4% previously), on the back of yield improvements in Indonesia, assuming normal weather conditions.
In the longer term however, future growth should come from an increase in mature areas (as 10% of its planted landbank is immature) and an improvement in age profile (as 20% of its landbank is between four to eight years in age).
Our forecasts have been revised down by 2.8% to 6.4% per annum for FY10 to FY12, after reducing our FFB yield and production estimates, adjusting our new planting assumptions for those years based on management guidance, raising our sales projections for the property development division; and raising our capex assumptions.
Risks include a reversal in crude oil price trend resulting in reversal of CPO and other vegetable oils price trend, weather abnormalities, change in emphasis on implementing global biofuel mandates; and a slower-than-expected global economic recovery.
As an investment case, post-earnings revision and adjustment of some of the target price-to-earnings (PE) ratio valuations for Sime's other divisions, we reduce our sum-of-parts based fair value for Sime to RM9.70 (from RM9.85). We have raised our target PEs for the motor sector to 14 times calendar year 2010 (from 12 times previously), the energy & utilities sector to 16 times calendar year 2010 (from 15 times), the heavy equipment sector to 14 times calendar year 2010 (from 13.5 times) and the property sector to 14 times calendar year 2010 (from 13.5 times), to be in line with the recent upgrades in these sectors' target valuations.
Maintain outperform recommendation for Sime given its further upside potential from government linked company reforms, additional merger synergies and yield improvements from its Indonesian plantations. - RHB Research Institute, April 29
This article appeared in The Edge Financial Daily, April 30, 2010.
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