Sime Darby - To miss its FY13E KPI of RM3.2b?

Period  2Q13/1H13

Actual vs. Expectations    SIME’s 1H13 core net profit* of RM1.68b was below the consensus expectation as it made up only 44% of the consensus FY13E estimate of RM3.77b. However, it was within our expectation as it made up 55% of our estimate of RM3.05b and we expect 2H12 earnings to be weaker due to low CPO prices.

 We believe that the consensus may have overestimated the CPO price performance in 1H13, which had weakened from Oct onwards due to an inventory surge.

Dividends  An interim single tier dividend of 7.0 sen was declared. This was within our expectation, but we believe it fell short of the consensus estimate of 10.0 sen, which is the amount of dividends announced in 1H12 last year.

Key Results Highlights  YoY, the 1H13 core net profit declined by 16% to RM1.68b as CPO prices dropped 15% to RM2432/mt and caused the plantation division’s EBIT to tumble 36% to RM1.19b. A better EBIT from the industrial (+7% to RM659m) and motor (+5% to RM320m) divisions, however, mitigated the group’s earnings decline.

 QoQ, the 2Q13 core net profit tumbled 26% to RM710m as CPO prices fell 18% to RM2207/mt and caused the plantation division’s EBIT to plunge 24% to RM512m. The industrial division’s EBIT also declined 26% to RM279m as equipment sales to the Australasia mining industry slowed down due to drop in coal prices.

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

Change to Forecasts  Maintaining our FY13E-FY14E core net profits of RM3.05b-RM3.55b.

Rating   Maintain UNDERPERFORM

 Possible FY13E consensus earnings downgrade should cause pressure on the share price.

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