Sime Darby - Good numbers yet again BUY

- We reaffirm our BUY rating on Sime Darby Bhd, with our fair value unchanged at RM12.30/share, assigning a 10% discount to our sum-of-parts value of RM13.70/share.

- Sime reported a 9MFY12 net profit of RM3.1bil (+34% YoY) – 2% and 3% above our, and street, estimates respectively – on the back of a 16% growth in revenue. While plantation business continued to be the main contributor – accounting for 58% of group’s EBIT – property (+50% YoY), energy & utilities (+65% YoY) and industrial (+41% YoY) showed stronger growth.

- The average CPO price realised was RM2,881/tonne for the period (versus RM2,828/tonne last year). Meanwhile, FFB production growth was more than decent at 5% although this was offset by a 7% decline in Indonesia FFB output. This can be explained by tree stress, delayed impact of El Nino in 2009 and a prolonged dry period in 2011 (June to September) on its trees in Kalimantan, although Sumatera trees fared better. 

- However, Sime’s earnings were weak QoQ (-24%) despite revenue declining by just 3%. The main culprit was due to:- (1)  the plantation division (EBIT -38% QoQ) on lower-than- expected FFB production of 2.05mil tonnes for 3QFY12 (-21% QoQ) because of weak Indonesia FFB output as mentioned above. However, there have been improvements at Kalimantan with a +9% MoM growth in yield and Indonesia as a whole at +6% MoM.

- (2) Weaker contribution from Energy & Utilities division due to recognition of the deferred revenue of RM99.4mil for the domestic power business in the previous quarter and lower throughput at Weifang Port in China due to the winter season.

- There was also a maiden contribution from Bucyrus to the tune of RM6.1mil during the quarter and the acquisition has boosted Sime’s industrial order book to RM4.6bil (+18% QoQ) – Bucyrus’ portion at RM2.6bil. 

- 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.

- On a valuation standpoint, Sime is currently trading at 12x CY12F versus its conglomerate peers of 18x. The counter also has deep value, trading at 30% discount to its SOP value.   

Source: AmeSecurities