Sime Darby rolls out demerger exercise plans

Sime Darby Bhd (Jan 31, RM8.91)

Maintain outperform call with an unchanged target price of RM9.30: Sime Darby Bhd has finally rolled out its long-awaited demerger exercise plans last Thursday, which will divide the group into three entities — Sime Darby Plantation Bhd, Sime Darby Property Bhd and Sime Darby Bhd.

We welcome the news as it helps maximise shareholder returns by unlocking the asset value of each core entity as valuations will be more attractive being a pure play business entity rather than a giant conglomerate.

We think that the plantation arm will be the first vehicle to kick-start the demerger plans due to the current bullish crude palm oil (CPO) price environment. Since the beginning of the year, Sime Darby’s share price has registered an 8.8% gain in anticipation of this, well exceeding the FBM KLCI’s gain of 3.1%.

Based on its gigantic planted land bank area of 603,254ha spanning Malaysia, Indonesia, Papua New Guinea and Liberia, Sime Darby Plantation is set to become the biggest public listed plantation company in Malaysia while also being able to boast the largest planted land bank in the world.

Taking into consideration its land bank size, regional footprint, fresh fruit bunch (FFB) production growth, FFB yield and age profile coupled with the current strong CPO prices, we strongly believe that the plantation arm would be able to attract healthy valuations for its public listing.

Based on our preliminary studies, the market capitalisation would likely be in the range of RM48 billion to RM55 billion or an estimated price-earnings ratio of 25 times to 30 times.

Meanwhile, based on Sime Darby’s annual property sales of more than RM2 billion, its property arm is also set to be one of the largest listed property players in the Malaysian market. It currently has total unbilled sales of RM1.2 billion and targets to see more launches in the near term with a combined gross development value of RM4.9 billion.

Sime Darby’s current projects are mainly in the Klang Valley, such as Elmina West in Bandar Bukit Raja. It also plans to unlock asset values in Labu and Pagoh (owning about 15,000ha), which will ride on the Kuala Lumpur-Singapore High Speed Rail and Malaysia Vision Valley developments.

Its 13,000ha in Carey Island could also be in play as the government plans to turn it into a massive industrial port city project with more than RM200 billion investments. In addition, it is also starting to reap gains from the London Battersea Power Station project with the first property earnings to be recognised in the third quarter of financial year 2017 (FY17).

Based on our valuations, the property arm could be listed at an estimated market capitalisation of not less than RM10 billion. However, we think that the property listing might be in the later part of the year as property sentiment remains lacklustre currently.

Other business segments such as industrial, motors and logistics as well as the healthcare segment will be parked under the current listed entity, Sime Darby Bhd. These segments collectively made up 31% of Sime Darby’s earnings in FY16.

Based on our sum-of-parts-based valuations, the remaining assets in Sime Darby would be worth at least RM18 billion. It will be interesting to see whether Sime Darby would be able to maintain its current market capitalisation or there will be further value enhancement upon the listing of its plantation and property segments.

The successful demerger models of IOI Corp Bhd and IOI Properties Group Bhd, and Telekom Malaysia Bhd and Axiata Group Bhd are good references for Sime Darby. — PublicInvest Research, Jan 27

This article first appeared in The Edge Financial Daily, on Feb 2, 2017. Subscribe to The Edge Financial Daily here.