Stock Name: SIME
Company Name: SIME DARBY BHD
Research House: OSK
Sime Darby Bhd
(April 6, RM8.76)
Maintain sell at RM8.75, target price of RM7.02: Sime Darby's conditions for its sale and purchase agreement (SPA) for Ramunia have been fulfilled, hence all parties involved will now take the necessary action to complete the acquisition.
Ramunia's fabrication capacity is estimated at 85,000 tonnes per annum. Assuming that its fabrication revenue was able to generate about RM15,000 per tonne, the total revenue contribution expected from this yard at full operational capacity would be about RM1.3 billion.
Also, if we assume an operating margin of 15%, this would contribute to about RM200 million annually.
Having said that, our estimation is only superficial as some higher margin oil and gas (O&G) products can generate operating margins of 20% to 30%.
However, we only expect this yard to achieve utilisation of about 30% in FY11. Our assumption is on the basis that Kencana's yard is currently about 50% utilised and assuming that Petronas and its production sharing contract (PSC) contractors dished out new fabrication contracts in 2H10, we believe that Kencana and MMHE would be the main beneficiaries given their delivery track record, while the balance of the jobs will flow down to other yards.
Also, we believe that the Ramunia yard will incur some start-up costs and go through a learning curve given its kick-start by a new management team.
Even assuming full utilisation of the Ramunia yard, the contribution to Sime's earnings will not be significant. The plantation segment is still the dominant contributor to Sime's earnings, making up 67% of 1HFY10 earnings before interest and tax (Ebit). If we factor in a crude palm oil (CPO) price of RM2,600 per tonne for CY10 and CY11, Sime's earnings would be bumped up to RM3 billion for FY10 and RM3.4 billion for FY11, which is slightly higher than consensus earnings.
At a CPO price RM2,600 per tonne, Sime's earnings per share (EPS) will be 52 sen for CY10, translating into a price-earnings ratio (PER) of 16.8 times. At our target PE of 15 times, Sime will be worth RM7.80, which is still below the current share price of RM8.75.
On the other hand, if Sime's PE can stretch to 20 times, it would be worth RM10.40. Hence, for investors to turn in a profit buying Sime at current levels, its PE needs to hit 20 times again with CPO at RM2,600. - OSK Research, April 6
This article appeared in The Edge Financial Daily, April 7, 2010.
Company Name: SIME DARBY BHD
Research House: OSK
Sime Darby Bhd
(April 6, RM8.76)
Maintain sell at RM8.75, target price of RM7.02: Sime Darby's conditions for its sale and purchase agreement (SPA) for Ramunia have been fulfilled, hence all parties involved will now take the necessary action to complete the acquisition.
Ramunia's fabrication capacity is estimated at 85,000 tonnes per annum. Assuming that its fabrication revenue was able to generate about RM15,000 per tonne, the total revenue contribution expected from this yard at full operational capacity would be about RM1.3 billion.
Also, if we assume an operating margin of 15%, this would contribute to about RM200 million annually.
Having said that, our estimation is only superficial as some higher margin oil and gas (O&G) products can generate operating margins of 20% to 30%.
However, we only expect this yard to achieve utilisation of about 30% in FY11. Our assumption is on the basis that Kencana's yard is currently about 50% utilised and assuming that Petronas and its production sharing contract (PSC) contractors dished out new fabrication contracts in 2H10, we believe that Kencana and MMHE would be the main beneficiaries given their delivery track record, while the balance of the jobs will flow down to other yards.
Also, we believe that the Ramunia yard will incur some start-up costs and go through a learning curve given its kick-start by a new management team.
Even assuming full utilisation of the Ramunia yard, the contribution to Sime's earnings will not be significant. The plantation segment is still the dominant contributor to Sime's earnings, making up 67% of 1HFY10 earnings before interest and tax (Ebit). If we factor in a crude palm oil (CPO) price of RM2,600 per tonne for CY10 and CY11, Sime's earnings would be bumped up to RM3 billion for FY10 and RM3.4 billion for FY11, which is slightly higher than consensus earnings.
At a CPO price RM2,600 per tonne, Sime's earnings per share (EPS) will be 52 sen for CY10, translating into a price-earnings ratio (PER) of 16.8 times. At our target PE of 15 times, Sime will be worth RM7.80, which is still below the current share price of RM8.75.
On the other hand, if Sime's PE can stretch to 20 times, it would be worth RM10.40. Hence, for investors to turn in a profit buying Sime at current levels, its PE needs to hit 20 times again with CPO at RM2,600. - OSK Research, April 6
This article appeared in The Edge Financial Daily, April 7, 2010.
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