Stock Name: SIME
Company Name: SIME DARBY BHD
Research House: UOB
Sime Darby Bhd
(May 30, RM9.15)
Upgrade to hold at RM9.13 with revised target price of RM9.40 (from RM8): Sime Darby reported 3QFY11 net profit of RM820.1 million, a turnaround from being loss-making in 3QFY10 but down 6.5% quarter-on-quarter. Results were above expectation.
Surprises came from stronger than expected contributions from the industrial divisions, which were not affected by the flooding in Queensland, Australia.
There is a proposed disposal of two yards to Petroliam Nasional Bhd (Petronas) and Malaysia Marine & Heavy Engineering Holdings Bhd (MMHE) for a total cash consideration of RM695 million. We view this positively as it can reduce Sime's earnings volatility and enable management to focus on its key competent divisions, especially on the growth of its plantation division.
We upgrade the stock to 'hold' from 'sell' with a higher target price of RM9.40 as we roll over to 15 times FY13F price-earnings ratio (PER). We have adjusted up our FY11, FY12 and FY13 earnings forecasts by 7.6%, 6.3% and 10.2% to an earnings per share of 51.3 sen, 56.6 sen and 62.8 sen. The adjustment is made mainly to factor in better contribution from the motor and industrial divisions.
Sime has entered into two non-binding MoU to sell its two fabrication yards for a total case consideration of RM695 million. The MoU is only for the takeover of assets under the two yards, which means the recently won RM1.15 billion Petronas contract to fabricate KBB topsides for the Kebabangan Northern Hub Development Project will remain under Sime. Sime will continue with this by leasing the space from Pasir Gudang yard. Management is guiding for an operating margin of 8% to 12%. Based on our earlier estimation based on pre-tax profit margin of 10% and equally spread over the 29 months, the potential earnings enhancement is about 1% to 1.2% for FY12/14.
The disposal is not a surprise as there has been market talk that MMHE is keen on Sime's oil and gas assets. We are positive on the O&G exit as it will remove concerns over potential losses and earnings volatility from this division and allow the group to focus on its core businesses.
Apart from the O&G shipyard disposal, Sime still has some non-core small businesses up for disposal. Dunlopillo Holdings is in the process of being divested and so is the 30% stake in Continental Sime Tyre. Sime will keep its existing power business and continue exploring new opportunities in Malaysia and Singapore.
Sime has been granted 220,000ha under a 63-year concession by the Liberian government to develop oil palm and rubber plantations. Sime plans to invest US$3.1 billion (RM9.4 billion) over the next 15 years. Sime aims to complete the planting of oil palm by 2022 or 2023, ahead of the initial timeline target of 2030. There will be about 55 estates and around 20 palm oil mills built. Cost of production in Liberia is about 10% to 15% higher than Malaysia's average. The first crude palm oil (CPO) production is expected to commence in 2013.
Share price catalyst: CPO price surging more strongly than expected. ' UOB Kay Hian, May 30
This article appeared in The Edge Financial Daily, May 31, 2011.
Company Name: SIME DARBY BHD
Research House: UOB
Sime Darby Bhd
(May 30, RM9.15)
Upgrade to hold at RM9.13 with revised target price of RM9.40 (from RM8): Sime Darby reported 3QFY11 net profit of RM820.1 million, a turnaround from being loss-making in 3QFY10 but down 6.5% quarter-on-quarter. Results were above expectation.
Surprises came from stronger than expected contributions from the industrial divisions, which were not affected by the flooding in Queensland, Australia.
There is a proposed disposal of two yards to Petroliam Nasional Bhd (Petronas) and Malaysia Marine & Heavy Engineering Holdings Bhd (MMHE) for a total cash consideration of RM695 million. We view this positively as it can reduce Sime's earnings volatility and enable management to focus on its key competent divisions, especially on the growth of its plantation division.
We upgrade the stock to 'hold' from 'sell' with a higher target price of RM9.40 as we roll over to 15 times FY13F price-earnings ratio (PER). We have adjusted up our FY11, FY12 and FY13 earnings forecasts by 7.6%, 6.3% and 10.2% to an earnings per share of 51.3 sen, 56.6 sen and 62.8 sen. The adjustment is made mainly to factor in better contribution from the motor and industrial divisions.
Sime has entered into two non-binding MoU to sell its two fabrication yards for a total case consideration of RM695 million. The MoU is only for the takeover of assets under the two yards, which means the recently won RM1.15 billion Petronas contract to fabricate KBB topsides for the Kebabangan Northern Hub Development Project will remain under Sime. Sime will continue with this by leasing the space from Pasir Gudang yard. Management is guiding for an operating margin of 8% to 12%. Based on our earlier estimation based on pre-tax profit margin of 10% and equally spread over the 29 months, the potential earnings enhancement is about 1% to 1.2% for FY12/14.
The disposal is not a surprise as there has been market talk that MMHE is keen on Sime's oil and gas assets. We are positive on the O&G exit as it will remove concerns over potential losses and earnings volatility from this division and allow the group to focus on its core businesses.
Apart from the O&G shipyard disposal, Sime still has some non-core small businesses up for disposal. Dunlopillo Holdings is in the process of being divested and so is the 30% stake in Continental Sime Tyre. Sime will keep its existing power business and continue exploring new opportunities in Malaysia and Singapore.
Sime has been granted 220,000ha under a 63-year concession by the Liberian government to develop oil palm and rubber plantations. Sime plans to invest US$3.1 billion (RM9.4 billion) over the next 15 years. Sime aims to complete the planting of oil palm by 2022 or 2023, ahead of the initial timeline target of 2030. There will be about 55 estates and around 20 palm oil mills built. Cost of production in Liberia is about 10% to 15% higher than Malaysia's average. The first crude palm oil (CPO) production is expected to commence in 2013.
Share price catalyst: CPO price surging more strongly than expected. ' UOB Kay Hian, May 30
This article appeared in The Edge Financial Daily, May 31, 2011.
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