October 13, 2011

MGO not required for Eastern & Oriental

Stock Name: SIME
Company Name: SIME DARBY BHD
Research House: RHBPrice Call: BUYTarget Price: 9.35



Sime Darby Bhd
(Oct 12, RM8.55)
Maintain outperform at RM8.50 with fair value of RM9.35: Sime Darby has announced that pursuant to a letter from the Securities Commission dated Oct 11, the SC has informed it of the following: (i) Further to its review of the above acquisition, it is the SC's finding that Sime Darby and Datuk Terry Tham Ka Hon are not parties acting in concert and as such a mandatory offer obligation would not arise; and (ii) That the SC's finding is without prejudice to a review of the decision should new facts arise in relation to the matter and the SC's right to take appropriate action provided under the securities laws as a consequence of such review.

We view this positively, and believe Sime will now be able to move on from this to focus on extracting synergies from its acquisition of the 30% stake in E&O, especially since Tham has assured shareholders that he will retain his role in E&O for the next few years.

We maintain our view that based on E&O's FY11 net profit of RM30.7 million, earnings accretion from this acquisition to Sime is negligible, after taking out the interest income foregone. Although consensus estimate for FY12 is much higher at RM94.8 million, E&O only achieved net profit ex-EI of approximately RM8.2 million or 8.6% of consensus earnings in 1QFY12. However, it is widely believed that stronger profit will only come in the later part of 2011 and 2012. In the longer term, we believe Sime would like to take part in E&O's Seri Tanjung Pinang 2 (STP 2) project, which has a GDV of RM12 billion, with profit only coming in two to three years.

Risks include: (i) a convincing reversal in crude oil price trends resulting in reversal of crude palm oil and other vegetable oils price trends; (ii) weather abnormalities resulting in an over or under supply of vegetable oils; (iii) increased emphasis on implementing global biofuel mandates and trans-fat policies; and (iv) a slower than expected global economic recovery, resulting in lower than expected demand for vegetable oils.

We make no change to our forecasts. We maintain our sum-of-parts-based fair value of RM9.35 and our 'outperform' recommendation on the stock. ' RHB Research, Oct 12


This article appeared in The Edge Financial Daily, Ocotber 13, 2011.

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