Sime Darby - Softening industrial business expected but plantation to remain resilient Buy

- We reaffirm our BUY rating on Sime Darby, but with our fair value cut to RM12.06/share based on a 10% discount to our revised sum-of-parts value of RM13.40/share. The lower sum-of-parts value is to account for slower recovery in downstream business and slower growth assumption for its industrial division amid softening market conditions and also higher debt assumptions. 

- Sime Darby reported a net profit of RM1.1bil for 4QFY12, bringing its FY12 earnings to RM4.15bil (+13% YoY) – just slightly above our, and consensus, estimates of RM4.0bilRM4.1bil. This is also some 27% higher than its conservative target of RM3.3bil.

- Sime declared a final dividend of 25sen/share, thus bringing its full year-DPS to 35 sen. 

- While earnings were mainly driven by the plantation business – CPO price realised at RM2,925/MT – the division recorded a decline in EBIT (-2% YoY) due to:- (1) lower FFB production amid bad weather conditions & tree stress; (2) continued losses at midstream & downstream because of weaker utilisation rates and lower Europe demand, among others.

- Moving into FY13F, the group is looking at a decent performance for the division with an expected recovery in FFB production, especially in Indonesia (+8% YoY). But having said that, downstream would continue to face challenges amid the Indonesian tax structure although as a whole, there has been a recovery in performance.

- The management indicated a challenging year ahead for the industrial division with signs of slowing orders already seen – due to the softening mining industry in Australia. It is also seeing deferments in orders for FY2014-FY2016. Sime, nonetheless, is looking at matching FY12’s performance for FY13, underpinned by a RM4bil order book.

- Sime Darby is looking at generating more than RM1.2bil (FY12 sales) for new sales in FY13F. We believe this is achievable, given its focus on affordable housing with 60% of its planned launches would be from this segment.

- The biggest concern for the motors divisions remains with China due to sustained competitive environment although we believe other markets should somewhat compensate for the expected weak performance.

- We are revising down our estimates by 3%-4% for FY13FFY14F to RM4.5bil-RM4.8bil due to lower margins at downstream business and slower growth assumption for the industrial business (4% vs 7%). We introduce FY15F earnings at RM4.9bil.   

Source: AmeSecurities