Sime Darby set to post better 2QFY14 earnings

Sime Darby set to post better 2QFY14 earnings
Business & Markets 2014
Written by Kenanga Research
Wednesday, 05 February 2014 10:05

Sime Darby Bhd
(Feb 4, RM8.87)
Maintain outperform with unchanged target price of RM10.30: We believe the year-to-date 6% decline in its share price to below RM9 recently has presented investors with an opportunity to accumulate Sime Darby at attractive valuation levels.

Even though crude palm oil (CPO) prices have improved significantly year-on-year (y-o-y) and are currently trading at above RM2,500 per tonne (against RM2,221 per tonne in January 2013), Sime Darby is surprisingly being traded lower than the January 2013 range of RM9.22 to RM9.71.

Additionally, we expect earnings for its second quarter ended Dec 31 of financial year 2014 (2QFY14) to improve quarter-on-quarter (q-o-q) due to better CPO prices and higher fresh fruit bunch (FFB) production.

Overall, we expect healthy FY14 earnings growth of 5% as earnings recovery in the plantation division should more than offset the weaker non-plantation division. We maintain our FY14E and FY15E core earnings at RM3.65 billion and RM4.05 billion respectively.

Reiterate outperform on Sime Darby with target price of RM10.30 based on sum-of-parts (SOP) valuation with the plantation division valued at 18.7 times forward price-earnings ratio (PER).

Valuation-wise, it is currently trading at only 13.4 times forward PER or 9% below its five-year average level of 14.8 times.

We gather that CPO prices have improved 7% q-o-q to RM2,511 per tonne in 2QFY14 (against 1QFY14’s RM2,345 per tonne). Additionally, FFB production has increased 4% q-o-q to 2.57 million tonnes in 2QFY14 (from 2.47 million tonnes in 1QFY14). As the plantation division is the biggest earnings contributor to Sime Darby, we believe this should translate into better 2QFY14 earnings for the group.

Its plantation division’s good earnings recovery should more than offset the weaker non-plantation divisions.

We believe that the prospect for the plantation division should improve significantly in FY14 as we expect Sime Darby to realise average CPO price of RM2,583 per tonne (or 11% higher than FY13 level of RM2,317 per tonne).

This is mainly due to our bullish view on CPO prices which, we expect, will average at RM2,800 per tonne in calendar year 2014 due to the strong demand for biodiesel from Indonesia and the expected lower inventory in Malaysia by end-2014.

Maintain “outperform” with unchanged target price of RM10.30. Our valuation of RM10.30 is also maintained based on SOP in which the plantation division is valued at 18.7 times forward PER which is in line with big cap planters’ valuation.


At the current share price, we expect total return of 18.7% (15.0% upside and 3.7% dividend yield). — Kenanga Research, Feb 4


This article first appeared in The Edge Financial Daily, on February 05, 2014.