Brexit impact on Sime Darby’s Battersea development limited

Sime Darby Bhd June 15 (RM7.64)

Maintain hold with an increased target price (TP) of RM7.16: For Sime Darby Bhd, we expect the impact of Brexit on Phases 1 and 2 of the Battersea development to be limited by the high take-up rates and locked-in sales. However, a weaker pound is likely to impact its ringgit-denominated share of profits. We don’t expect the impact of Brexit on other core to be significant.

Gross gearing of the group declined to 0.48 times as at the end of March 2016, and is on track to decline to the target level of 0.3 times by end-financial year 2017 (FY17), which we believe should lead to debt rating upgrades.

Sime Darby is leading in sustainability compliance, with almost all of its upstream and downstream business units being Roundtable on Sustainable Palm Oil-certified. In plantation development, the group complies strictly with sustainability principles, criteria, processes and standards. There is a zero burning policy since 1985. The landmark high-carbon stock study was completed in December 2015, and trials will be carried out.

The worst may be over for the other core divisions, but meaningful upturns in these core businesses are still not evident.

We have tweaked our FY17 estimated (FY17E) core net profit forecast higher by 0.8%, and FY18E forecast lower by 1.8%. We maintain our “hold” rating on the stock, with a slightly higher price-earnings ratio-based 12-month TP of RM7.16, from RM7.11. A key upside risk is stronger-than-expected crude palm oil (CPO) prices. Key downside risks include a deterioration in the global economic outlook and weaker-than-expected CPO prices. — Affin Hwang Research, July 15

This article first appeared in The Edge Financial Daily, on July 18, 2016. Subscribe to The Edge Financial Daily here.

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