May 12, 2010

SIME - RHB Research: Sime still an outperform

Stock Name: SIME
Company Name: SIME DARBY BHD
Research House: RHB

Sime Darby Bhd
(May 11, RM8.63)
Maintain outperform at RM8.60 with fair value of RM9.70
: Sime Darby Motor Division Sdn Bhd has entered into a property sale agreement with Sapura Auto Sdn Bhd to acquire a 0.11-acre piece of freehold land on Jalan Tun Razak, Kuala Lumpur, together with the automobile showroom and related facilities for the provision of after-sales services for a cash consideration of RM49.05 million. The acquisition is to be completed by end-2010.

We are pleasantly surprised that this deal does not involve buying the company itself (which is loss-making) and only involves buying just the land and building. This means that Sime is not committed to buy any of Sapura's existing stock/inventory.

We believe this acquisition makes more sense for Sime, as it will be able to immediately utilise the existing showroom and the 4S centre for its BMW and MINI operations following the recent closure of its Bukit Bintang branch in December. Besides that, Sime would also have the opportunity to tap into Sapura's existing customer base, in line with its strategy of expanding in major cities like Kuala Lumpur.

Based on the market value of the property given by the valuer Henry Butcher of RM47 million, we would say this is a fair price to pay, given the prime location of the land.

Forecasts unchanged as this acquisition would only dent earnings by less than 2%. The risks to our view are: (1) the reversal in crude oil price trend resulting in a reversal of crude palm oil and other vegetable oils price trend; (2) weather abnormalities; (3) change in emphasis on implementing global biofuel mandates; and (4) slower-than-expected global economic recovery.

No change to our fair value of RM9.70 per share. Maintain outperform recommendation for Sime given its further potential upside from GLC reforms, additional merger synergies and yield improvements from its Indonesian plantations. - RHB Research Institute, May 11
This article appeared in The Edge Financial Daily, May 12, 2010.

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