Thursday, 14 March 2013

Sime Darby - Expanding its healthcare division soon?

News    According to the Wall Street Journal, SIME is in talks with Australia’s Ramsay Health Care Ltd. (RAMSAY) to form a joint venture (JV) that combines several hospitals in Southeast Asia.

The news elaborated that the talks involved SIME injecting three hospitals in Malaysia into a vehicle that will also include three of RAMSAY’s Indonesian hospitals.

It also quoted a person familiar with the matter as saying that the JV could eventually be listed on the Malaysian stock market.

Comments   If the news materialises, we would view the JV positively as the investment in the healthcare industry should strengthen SIME’s earnings under its non-plantation segment in the long term. However, the short-term earnings impact should be minimal as its healthcare division registered only an EBIT of RM26m or 0.4% of the group’s EBIT in FY12.

That said, we believe that there is strong growth potential for the healthcare industry in Indonesia given that its Health Expenditure Per Capita* (HEPC) has grown at a strong 5-year CAGR of 23% to USD77 in 2010 (based on The World Bank data). Even after growing at this level, there is still room for more growth due to the HEPC low base of USD77 as compared to Malaysia’s USD368 and Singapore’s USD1,733 in 2010.

Outlook   Our main concern is still SIME’s plantation division earnings, which contributed RM3.2b or 54% of the group’s EBIT in FY12.

Recall that SIME’s FY13 KPI of RM3.2b in net profit** is based on an average CPO price assumption of RM2700/mt. As CPO prices in Jan-13 and Feb-13 have been weak at an average of RM2310/mt, we believe that SIME should miss its FY13 net profit KPI above. Note that we are only expecting a FY13E net profit of RM3.05b, in line with our assumption of an average CPO price of RM2500/mt for CY13E.

Forecast    Maintaining our FY13E-FY14E core net profits of RM3.05b-RM3.55b.

Rating   Maintain UNDERPERFORM
A possible FY13E consensus earnings downgrade should pressure the share price. Note that the consensus is still estimating an average CPO price of RM2880/mt for CY13.

Valuation   Maintaining our Target Price of RM8.82 based on a Sum-Of-Parts valuation (refer Page 3).

Risks    Better than expected CPO prices.

Source: Kenanga

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