Sime Darby - Expecting a strong rebound in CPO price BUY

- Sime Darby (Sime) reported a weak 2QFY13F net profit of RM708.5mil, which brings its 1HFY13F earnings to RM1,698.8mil. This came short of our, and consensus, expectations, covering only 38% and 45% of estimates, respectively.

- The shortfall was due to a weaker average CPO price realised at RM2,432/tonnes versus RM2,872/tonne a year earlier. As a consequence, operating profit dropped by about 42% YoY for the plantation division.

- Earnings weakened by 29% QoQ mostly due to weak plantation numbers amid unfavourable CPO prices of RM2,200/tonnes despite a higher CPO sales volume. All other divisions showed lower growth, except for the motors and E&U units.

- Nonetheless, the management is expecting a strong rebound in CPO price for 2HCY13 – looking at an average price of RM2,700/mt-RM2,800/mt. This is based on expectations that inventory will be managed via government policies to be introduced in the near term.

- Apart from that, the other key take-away is that the motors division was the only business unit that showed growth in operating profit (+7% YoY). This was due to strong sales in all makes, especially in Malaysia and Australia & New Zealand.

- We gather in total, Sime had sold 45,587 units for 2QFY13. However, the operating environment in China remains tough – some dealers gave up to RMB100k in discounts for the BMW 7-series model, although there is some slight improvement in demand.

- Further to that, Sime indicated that the industrial division has probably seen its worst, especially in the Australasia region, given the recovery in coal prices. In fact, the unit is in the midst of securing two major contracts. Order book now is at RM3.7bil as at 2QFY13, on par with that in the same period last year.

- We maintain our BUY rating on Sime Darby, but we are putting our estimates and fair value UNDER REVIEW, pending a meeting with the management.

Source: AmeSecurities