Sime Darby - Sime's risk to be cushioned by strong partners

In a surprise move, Sime Darby has emerged as S P Setia’s joint partner in the bid for the highly-coveted Battersea Power Station. 

This is contrary to what had been speculated earlier in a news report that the Employees’ Provident Fund (EPF), together with S P Setia and RREEF, Deutche Bank’s real estate arm, had made a joint-bid for the power station with an offer of GBP375 (RM1.8bil). Nonetheless, in response to the report, EPF had since denied it had made a bid. 

We believe this would be Sime’s first major overseas property venture, but we acknowledge that its risks would be cushioned by the presence of strong partners such as S P Setia and other parties with strong balance sheet to ride through the cycles. This is especially true when the project would likely be NPV negative at least during the construction period. 

While it is a lucrative piece of land, the parties will be entering an unfamiliar market and we understand the redevelopment of this iconic building would be challenging. There is a need to set aside funds to conserve the derelict power station and it is not certain whether the funding for the London Underground extension has been finalised. On top of that, we understand the re-development would be even more taxing given the presence of a waste transfer station and a cement plant on the river frontage. 

Nonetheless, we prefer to be NEUTRAL on this news due to the absence of details, particularly relating to the ownership and funding structure. That aside, this news should not distract investors’ focus away from Sime’s expected healthy growth (+11% YoY) in earnings, which would be anchored by its plantation business.

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 would be attributed to the recent acquisition of Bucyrus.

On a valuation standpoint, Sime is currently trading at 13x CY12F versus its conglomerate peers of 17x. The counter also has deep value, trading at about 30% discount to its SOP.

Source: AmeSeurities