Sime Darby - Stronger Sime due to stronger CPO price BUY

- We reaffirm our BUY recommendation on Sime Darby, with our fair value raised to RM12.30/share (from RM11.80/share previously), pegging a 10% discount to our revised sumof-parts value of RM13.70/share (vs. RM13.10/share previously). 

- The higher SOP is the result of a stronger average CPO price assumption of RM3,400/tonne (vs. RM3,300/tonne previously), in line with our house CPO price. 

- The RM100/tonne increase in our assumption has boosted Sime Darby’s plantation EBIT for FY13F- FY14F by 6.4%-6.6% and net profits by 3.9% to 4.1% for the same period, translating into EPS of 77.0 sen-82.1 sen.  

- CPO prices will continue to be robust, to be supported by positive demand and slower supply growth. 

- Sime Darby has guided for a rather flat FFB production growth of 3%-5%, in line with the expected flat production growth for Malaysian and Indonesian planters in FY12F. 

- Oil palm trees could be facing stress after a bumper harvest in 2011 and there may be a lag impact from the drought which took place 2Q2010.

- On top of that, industry experts are expecting lower soybean oil production in South America, whereby  Oil World  had recently forecast world soybean output to decline 8.1% to 243 million tonnes in 2012F due to adverse weather in South America.

- There is further upside to our earnings estimate as we assume costs of production of RM1,100/tonneRM1,200/tonne versus management’s guidance of RM1,000/tonne. Our sensitivity analysis indicates a 10% upside to our plantation EBIT for FY13F-FY14F.

- While our BUY call mainly centres on its plantation business – (1) 60%-65% of its earnings coming from plantation division, and (2) Sime Darby is the most liquid proxy to the plantation sector with a sizeable weighting in the FBM KLCI of about 8.8% – Sime’s industrial division offers the strongest EBIT growth of about 10% p.a., which could be attributed to the recent acquisition of Bucyrus.

- Sime Darby is attractive, being the cheapest amongst the bigger plantation stocks – trading at CY13F PE of 12x –  vis-a-vis KL Kepong (16.5x CY13F) and IOI Corp (13xCY13F).  Likewise, Sime Darby is trading at a 27% discount to its conglomerate peers’ average of 16.5x.

Source: AmeSecurities