SIME (FV RM10.32 - BUY) 9MFY12 Results Review: Production Weaker Than Expected

We are maintaining Sime Darby as a Buy, with  our FV reduced to RM10.32 from RM10.80 previously as we cut our FFB production expectations due to weakness in both its Malaysia and Indonesia operations. The earnings YTD have so far been in line due to strong contribution growth from the industrial segment following the acquisition of Bucyrus  at the  end  of  last year.  We are  reducing our  forecast to allow for a weaker palm segment in 4Q. Despite the  slimmer upside, Sime Darby as still a Buy pending a sector review.

Results within expectations. Sime Darby’s annualized 9MFY12 core earnings were within our forecast as well as consensus expectation. This was despite the 23.8% q-o-q decline in core earnings as 1H already  accounted for  55.3% of our full-year forecast. Nevertheless, in view of the prospects of a weaker FFB production in the final quarter, we are trimming our forecast by 4.9% for FY12 and 4.1% for FY13.

Q-o-q weakness  in most segments. Not surprisingly, most segments showed seasonal weakness in the March quarter except for the industrial segment, which was going strong following the acquisition of Bucyrus in late 2011. The industrial segment recorded a 20.3% q-o-q increase in EBIT despite sales remaining flat. Management expects  a  RM67m contribution  this year from Bucyrus, which has  an  orderbook  worth RM2.6bn.

Plantation segment enters low crop period. Earnings in the plantation segment plunged 37.9% as output shrank 21.8% q-o-q, but this was mitigated by a 3.5% increase in average CPO price realized. On a YTD basis, FFB production was flat as production from the group’s Indonesian estates fell by 7.0% while that from the Malaysian estates grew 5.2%.  In view of  the weakness in Malaysia’s production  during  the April-May period, management is guiding for a 1%-2% decline in this year’s production.  As our FFB production forecast is 10.8m tonnes,  this  means  that  Sime has to  achieve  3.3m tonnes in 4Q, which appears overly-optimistic.  Hence we are trimming our production forecast to 10.2m tonnes.

Adjusting forecasts. In line with our toned-down FFB production estimates, our FY12 earnings forecast accordingly drops to RM3,849.4m while our FY13 forecast is reduced to RM3,903.2m. The earnings downgrade trims our FV to RM10.32, giving an upside of 7.1% from current levels. Maintain Buy for now, pending our sector review.

Source: OSK