Sime Darby - Looking to buy Jimah power plant BUY

We reaffirm our BUY rating on Sime Darby (Sime), with our fair value of RM10.60/share currently under review with an upside bias, pending a meeting with management.

It has been reported that Sime is looking to acquire the 1,400 MW coal-fired Jimah power plant in Port Dickson which is valued at above RM1.1bil. The plant is reported to have been up for sale for quite some time and several parties, including Malakoff, a unit of MMC Corp, had shown interest previously. There were also plans by the owner to list the plant although it did not materialise.

The power plant is owned by Jimah Energy Ventures Holdings Sdn Bhd, of which 70% is owned by the Negeri Sembilan royal family – under Jimah Teknik Sdn Bhd – and the remaining shareholders are TNB (20%-stake) and Jimah O&M Sdn Bhd (10%).

The plant started operations in 2009 and is a third generation independent power producer with a 25-year concession to supply power to TNB.

We are not surprised that Sime is looking to acquire power plants given that it needs to grow its Energy & Utilities (E&U) division, having  sold its oil & gas business. We understand talks are at preliminary stage and Sime is currently doing the due diligence.  The group is looking at other power plants within Malaysia as well. 

To recap, in 1HFY12, the power unit was the main contributor to E&U’s EBIT, accounting for 76%  – albeit there was a one-off recognition of deferred revenue to the tune of RM99mil during 2QFY12 from the power tariff revision. We estimate E&U to contribute about 5% and 3% to its revenue and operating profit in FY12F, respectively. 

We continue to like Sime as the company is the most liquid proxy to the plantation sector, which accounts for 61% of its FY11’s EBIT. Valuations are also attractive, currently trading at CY12F PE of 16x which is below its 3-year average of 17x.

Source: AmeSecurities