Sime Darby - Solid numbers all around BUY

Stock Name: SIME
Company Name: SIME DARBY BHD

Research House: AMMB

Price Call: BUY

Target Price: 10.60

We maintain our BUY rating on Sime Darby, but with our fairvalue of RM10.60/share placed under review with an upside bias pending a managementmeeting.

Sime reported a 2QFY12 net profit of RM1.1bil, which bringsits 1HFY12 earnings to RM2.2bil or an impressive +42% growth YoY. This came inwithin our, and street, expectations, covering 53% and 55% of full-yearestimates, respectively. It declared an interim dividend of 10sen/share (versus8 sen/share for 1HFY11).

Key highlights from the 1HFY12 earnings announcement:-

Plantation division saw its EBIT growing by a massive 38% YoY,driven by a stronger average CPO price of RM2,872/tonne versus RM2,692/tonne in2QFY11. Solid FFB production growth of 4.6% was driven by healthy growth (+9.5%YoY) in Malaysia although production in Indonesia slid by 4%. OER was slightlyhigher at 21.9% against 21.4% due to new mills in operation and some upgrades.

However, its downstream division reported losses of RM37milwhich were mostly due to the weak performance at its Holland operations 'affected by a competitive market, and high operating costs due to inefficientmills.

Industrial showed solid growth in EBIT (+38% YoY) to RM628mil,underpinned by strong mining & logging activities in the Australia region.We expect this division to continue to perform given the expected continuedrobust mining activities. That aside, a one-off acquisition cost relating tothe purchase of Bucyrus was recognised during the quarter which amounts toRM62mil.

Motor division EBIT growth of 11% was capped by a weakercontribution from China/HK as result of forex losses of RM37mil. Discountingthe losses, growth would have been a healthy 31% YoY. On the flipside, the new BMW3-series and Hyundai Elantra & Veloster will be launched by 1HCY12 inMalaysia and these models would be one of the key drivers for the motor unit.We have assumed a 10% revenue growth for FY12F or a volume of circa 79,000cars.  

The tighter credit on hire purchase would have a negligible impacton Sime's motor division, given its portfolio mix are dominated by higher-endmakes.

We continue to like Sime as the company is the most liquid proxyto the plantation sector, which accounts for 61% of its FY11's EBIT. Valuationsare also attractive, currently trading at CY12F PE of 15x which is below its3-year average of 17x.  

Source: AmeSecurities