Sime Darby - Commendable Performance

Sime Darby remains a Buy, with an unchanged FV of RM11.18. Despite the strong FY12 performance, there are still concerns over its non-plantation segments, which are cyclical in nature and potentially vulnerable to global economic weakness. The upcoming El Nino will probably benefit Sime’s plantation segment less than its peers since it has a rather low portion of young trees. Still, the stock is trading at 14x CY13 earnings, which we deem fairly undemanding as Sime is faring better under CEO Datuk Mohd Bakke Salleh’s leadership. Maintain Buy.

Beating OSK estimate. Sime’s FY12 core earnings of RM4,121.4m beat our forecast by 7.1% but were within consensus forecast. Compared to FY11, the group’s core earnings jumped 18.1%, fuelled by the industrial, motor and energy & utilities segments.

FY12 plantation flat. Plantation EBIT was flat at RM3,214.9m with the realized CPO price of RM2,925 per tonne (blended M’sia & Indonesia price) being 0.7% higher, while own CPO production was down 2.0%. On a y-o-y basis, the June quarter EBIT of RM800.0m was 36.2% lower due to a 14.9% decline in volume, with the price being 1.7% lower. The group also experienced a 14.0% increase in cost per tonne to RM1117. Going forward, Sime is targeting a production growth of 8% for its Indonesian plantations and 4% for the Malaysian plantations.

Industrial segment the star performer. The industrial segment did well in FY12 despite the global economic weakness, registering a 26.8% growth in EBIT. Of Sime’s RM490.9m increase in overall EBIT, the industrial segment contributed RM280.2m or 57.1%. Of the four regions it operates in, only China/HK registered a decline in earnings. Newly-acquired Bucyrus contributed RM58m in 2HFY12, without which Sime’s 2H industrial segment earnings would still have grown by 10.6%. There are some concerns of order deferral due to slowdown in mining activities. Management said the delay in confirmation of delivery orders are for FY14-FY16 and woul does not affect FY12-FY13.

Motor segment. The motor segment continued to do well, with EBIT rising 11.4% y-o-y. Still, there was weakness in China/HK, where EBIT fell 26% y-o-y, but this was mitigated by growth in its Malaysian EBIT. Management is cautious on this segment’s outlook given the global uncertainties.

Maintain forecast. We are maintaining our conservative FY13 net profit forecast of RM3,915.4m, which is 8.7% lower than consensus. This is due to a potential slowdown in Sime’s non-plantation segments, which have done well so far. We are also cautious on the El Nino’s potential impact on Sime’s palm oil production given that its trees are on the older side.

Source: OSK