Sime Darby - More cautious stance on industrial and motors BUY

- We reaffirm our BUY rating on Sime Darby (Sime), with our fair value cut to RM11.20/share (from RM12.10/share previously), pegging a 10% discount to its revised estimated sum-of-parts value of RM12.40/share (RM13.40/share previously). The lower fair value is premised on a cut in earnings estimates for the industrial and motors divisions.

- Sime reported 1QFY13 earnings of RM990.3mill which came largely within expectations, covering 23% and 24% of our previous and consensus estimates for FY13F, respectively.

- Sime’s earnings slid by 10% QoQ largely due to:- (1) weaker contributions from the plantation division as a result of lower CPO volume sold and weaker price realised at RM2,700/tonne (versus circa RM3,000/tonne in 4QFY12), and (2) a 33% drop in motor contribution resulting from tough operating environment in China.

- Weaker plantation numbers also contributed to a decrease in earnings YoY (-8%) on the back of weaker China demand and higher CPO price (RM2,946/tonne) realised last year.   

- Sime’s FFB production grew by 6%, whereby a 20% growth in Indonesia more than offset the 4% drop in production from its Malaysian trees.

- From its briefing, we gather that management has turned more cautious on the industrial and motor divisions. In fact, industrial order book again saw a decline in order book amid deferment in orders. Sime has decided to cut its capex (at least by 20%) for the division to RM1.1bil. 

- Similarly, the Chinese markets would continue to be challenging in the subsequent quarters for the auto segment; although sales in Malaysia and other markets may slightly offset the shortfall in China sales. 

- We cut our earnings by 7%-10% for FY13F-FY14F following our lower growth assumptions for both the industrial and motor divisions. We now assume a 3% (vs. 5% previously) revenue growth, while reducing its operating margin to 9% for the former and we cut motor’s margin in China to 3.5%-4% with slower revenue growth of 15% vs. 20% previously.

- From a valuation standpoint, Sime is trading at an attractive CY13F PE of 14x, which is at a 20% discount to its 5 year historical average and conglomerate peers’ 17x-18x. We expect the stock to trade within range in the near term due to weak sentiment, but demand recovery in CPO will provide impetus for better valuation.  

Source: AmeSecurities