Sime Darby FY17 results beat expectations

Sime Darby Bhd (Aug 28, RM9.09)

Maintain buy recommendation with a slightly lower target price of RM9.96: Sime Darby Bhd’s fourth quarter of financial year 2017 (4QFY17) core net profit (CNP) of RM939 million (quarter-on-quarter [q-o-q]: up 45.6%; year-on-year [y-o-y]: up 3%) took FY17 CNP to RM2.48 billion (up 51%). The results beat expectations, exceeding consensus and our forecasts by 10% to 10.4%. FY17 net profit and return on equity of RM2.44 billion and 7% beat key performance index targets, by 11% and 0.6% points respectively.

Deviation: Better-than-expected performances from plantation and motor divisions.

Sime Darby proposed final dividend per share (DPS) of 17 sen, bringing total DPS for FY17 to 23 sen, which is within our expectations.

Q-o-q, 4QFY17 CNP rose 45.6% to RM939 million, boosted mainly by higher earnings from its motor division (which in turn were due largely to higher contribution from BMW Malaysia), RM57 million earnings contribution from the Battersea project and lower finance costs.

Y-o-y, 4QFY17 CNP increased by 3% to RM939 million as lower industrial earnings were more than offset by higher earnings contribution from plantation and motor divisions, contribution from the Battersea project, lower finance costs and lower losses at its property division.

Year to date, FY17 CNP surged 51% to RM2.48 billion, boosted mainly by improved earnings contribution from plantation (due to higher fresh fruit bunch [FFB] production and palm product prices) and motor divisions, RM140 million earnings contribution from the Battersea project, and lower finance costs (arising from repayment of borrowings from the proceeds of the RM2.2 billion perpetual sukuk and RM2.3 billion share placement).

All these more than offset a weaker property performance (resulting from weak sentiment and lower contribution from the Pagoh Education Hub) and earnings contribution from the industrial division.

Risks include a sharp fall in FFB output and/or palm product prices, prolonged weak demand for mining equipment, and delays in property launches.

Forecasts are maintained, as we believe we have already reflected our optimism on Sime Darby’s earnings prospects in our forecasts. We maintain our “buy” recommendation on Sime Darby, underpinned by its plan to spin off the plantation and property businesses, which would further crystalise Sime Darby’s deep intrinsic value.

On a separate announcement, Sime Darby announced that the final terms of its restructuring proposals to create three stand-alone listed entities in the plantation, property, and trading and logistics sectors have already been approved and it is on track to list the plantation and property businesses on Bursa Malaysia by end-2017. — Hong Leong Investment Bank Research, Aug 28

This article first appeared in The Edge Financial Daily, on Aug 29, 2017.

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