Sime Darby - OUTPERFORM - 27 June 2012

We rate Sime Darby (SIME) as one of the Top 10 Picks for our 3Q12 Investment Strategy. We like SIME for its  i) attractive valuation among the big cap planters, ii) potential dividend of 25.5 sen in the near term and iii) strong 9M12 results with core net profit growth of 34% YoY to RM3.1b. We are maintaining our FY12-13E core net profits of RM4.22b-RM4.38b based on an unchanged CPO price assumption of RM3,200 for CY12 and CY13. We are maintaining an OUTPERFORM rating on SIME with an unchanged Target Price of RM10.80 based on Sum-Of-Parts valuation. We have pegged an unchanged Forward PER  of 17.5x for its plantation segment in line with our targeted Forward PER for the other big cap planters.

The most attractive valuation among the big cap planters. SIME is trading at only 13.5x FY13E forward PER, 16% below IOICORP’s 16.0x and 21% below KLK’s 17.1x. It is also 13% below its 5-year historical average Forward PER of 15.5x. We think that this is unjustified considering it has the biggest market cap, highest liquidity and also the highest dividend yield among the three big cap planters. Note that SIME’s FY13E dividend yield of 3.7% is higher than  KLK’s 3.4% and IOICORP’s 3.1%.

Look ahead to final dividend of 25.5 sen in Aug. This will likely bedeclared during its 4Q12 results announcement. We expect the final dividend to be 16% higher YoY against last year’s final dividend of 22.0 sen in line with its improved earnings. For FY12E,  we are expecting a total net dividend of 35.5 sen, implying a generous dividend yield of 3.7%. We have assumed a 50% payout ratio in line with SIME’s historical practice to pay out a minimum 50% of its earnings.

9M12 core net profit surged 34% YoY to RM3.1b. The plantation division’s EBIT jumped 21% YoY to RM2.42b as CPO production improved 5% YoY to 1.86m mt while the CPO ASP inched up 2% to RM2,881 per mt. The industrial division’s EBIT grew  41% YoY to RM966m due to the strong demand for heavy equipments from mining, logging and construction sectors in Australasia, Malaysia and Singapore.All the other business divisions’ EBIT improved too, suggesting SIME’s turnaround strategy has been well executed thus far.

Maintaining core net profits of RM4.22b-RM4.38b, decent growth of 9%-4%.  FY12E core earnings will be supported by a higher CPO production of 2.51m mt (+6% YoY) and a strong industrial division’s EBIT at RM1.18b (+13% YoY). For FY13E, the earnings growth will mainly come from a better CPO production at 2.57m mt (+3% YoY) and a better motor division’s EBIT of RM640m (+8% YoY).  

Source: Kenanga