Sime Darby - USD800m Sukuk attractively priced

News   Sime Darby (SIME) announced to Bursa that it had successfully priced its first USD800m Sukuk issue. We gather that the Sukuk will be issued in two tranches of USD400m with a 5-year tenure and the balance USD400m with a 10-year tenure respectively. This is part of its Multi-Currency Sukuk Programme with a limit of up to USD1.5b.

 Pricing for the 5-year tenure, the Sukuk was at 130bps above US Treasuries rate or 2.053% while the 10-year tenure Sukuk was at 145bps above US Treasuries rate or 3.290%.

 The whole USD1.5b Sukuk was rated A by Fitch Ratings, A by Standard & Poor’s and A3 by Moody’s.

 We understand that SIME’s Sukuk issue attracted a strong order book of more than USD8.0b or an oversubscription of 10x.

 Proceeds from the debt would be used to finance SIME’s capital expenditure, working capital requirements and general corporate purposes among others.

  

Comments   We are positive on the news as both the Sukuk interest rate of 2.053% and 3.290% are lower than the existing interest cost of SIME, which is believed to be around 5.5%. This should result in estimated interest rate savings of 2.67% or about RM65.0m.

 SIME’s current net gearing is still comfortable at 18% as at end-Sep12 and we expect it to remain below 20% for both FY13E and FY14E.

  

Outlook  Despite our positive view on the Sukuk issue given its attractive pricing, the Group’s near term outlook will still be very much influenced by the current low CPO prices. Hence, we believe its 2Q13 result could disappoint as it should reflect the low CPO price impact of below RM2250/mt.

 However, SIME’s long-term growth remains intact premised on the longer term bullish CPO price outlook and good earnings support from its nonplantation divisions.

  

Forecast  We are maintaining our FY13E-FY14E earnings of RM3.68b-RM3.83b. We have left our FY13E estimate intact as the estimated impact of the interest savings of about RM65m is minimal (<2%).

  

Rating Maintain MARKET PERFORM

 The limited upside seen in CPO prices should keep SIME’s share price upside capped.

  

Valuation   We are maintaining our TP of RM9.00 based on a Sum-Of-Parts valuation with the Plantation division valued at 17.5x FY13E earnings. 

  

Risks  Sustained low CPO prices at below RM2500/mt.

 Lower than expected margin from industrial division.

Source: Kenanga