Fundamental Analysis for SIME DARBY BHD

Transcription

1 Page 1 of 7 Fundamental Analysis for SIME DARBY BHD Company Name: SIME DARBY BHD Board: Main Board Stock Code (Bursa): SIME FBMKLCI: TRUE Bloomberg: SIME:MK Reuters: SIME.KL Industry: TRADING SERVICES Sub-Sector: Company Description: OIL PALM/RUBBER AND OTH CROP PRODUCTION PLANTATION; PROP; MOTORS; INDUSTRIAL; ENERGY & UTILITIES. Date of Analysis: 1-Mar-12 Price: 9.93 Financial Year: Investment Strategy: 30/6/ Value Investing Position Strategy: Lump Sum + Top Up Averaging Down Method: Dollar Cost/Value Stock Grade: Large Capital Growing Averaging Management Bear Case Profitability Economic Moat Financial Health Profitability 4 Economic Moa 4 Financial Heal 5 Growth 4 Bear Case 5 Management 5 Growth

2 Fundamental Analysis - Value Investing All figures in millions of Ringgit Malaysia except per share values and ratio Measures Profitability Consistently increasing sales /6/30 12,053 13,718 14,904 18,646 20,162 20,735 34,045 31,014 32,845 41,859 I R Comments Consistently increasing Net Income After Tax ,121 1,597 3,512 2, ,665 Consistently increasing EPS Consistently increasing revenue in the last 5 quarters. Consistently increasing net profit in the last 5 quarters. Consistently increasing EPS in the last 5 quarters The current quarter's EPS 15% from the same quarter the year before. Economic Moat Consistently increasing Net Cash from Operations Consistently high ROE > 15% Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 10,282 10,599 13,059 11,064 11, ,313 1,074 1, /6/ ,154 1,644 3, ,570 3,393 11% 10% 11% 10% 13% 16% 16% 11% 4% 15% 25% JTI registered FY11 earnings of RM122.8m (-8.2% y-o-y) with sales volume falling by 2.3%. Its VFM brand Winston experienced sales erosion after sub-vfm cigarettes were sold at below-minimum prices in early-. Consistently ROTA > 1.2% 6.19% 5.49% 5.91% 4.94% 6.39% 8.17% 9.76% 6.43% 1.93% 8.55% ROIC > 15% 8.80% 7.21% 8.38% 7.80% 5.32% 7.26% 9.82% 8.73% 3.90% 12.56% Working capital increase slower than sales N/A 49% 4% 0% 15% 25% 52% -28% -2% 38% Short & declining "Cash Conversion Cycle" Free Cash Flow / Sales > 5% 3% 3% 1% 1% 2% 3% 6% -3% 4% 4% Gross Profit Margin (> 40%) 29.94% 30.36% 26.58% 24.36% 23.64% 23.26% 26.22% 23.02% 26.82% 25.68% Net Profit Margin (> 10%) 6% 6% 6% 4% 6% 8% 10% 7% 2% 9% Strong brand, monopoly or barriers to entry Monopoly Situation: Strong Leading Brand: High Barriers to Entry: Market Leadership: NO Strong High Strong

3 Financial Health Long term debt < 4 times Net Profit Debt/Equity Ratio < 1 Current Ratio > /6/ Growth Quality of Historical /6/30 Throughout the years, the growth rates are mixed with positive and negative. The performance was mainly impacted by fraud case in Bakun /6/30 - Revenue Growth: - Operating Income Growth: - EPS Growth: - Net Cash From Operation Growth: N/A 14% 9% 25% 8% 3% 64% -9% 6% 27% Avg: 16% σ: 21% N/A 13% 13% 1% -14% 30% 177% -27% -34% 163% Avg: 36% σ: 79% N/A 5% 13% -14% 37% 31% -1% -36% -68% 404% Avg: 41% σ: 140% N/A 44% -30% 13% 57% 42% 139% -76% 281% -5% Strong future growth drivers From Q4 Press Release: Avg: 52% σ: 105% With regards to the execution of the strategy blueprint, he reported that key strategic initiatives to drive operational excellence and build an optimal investment portfolio for growth have been put in place in the first half of FY/2012. "Each division has established a strong platform for continuous operational improvements. Indeed, the current financial performance is partly a result of the efforts undertaken to enhance operational efficiencies. All divisions are also focused on pursuing organic and inorganic growth opportunities that had been identified in the strategy blueprint" he added. In particular, he highlighted the completion of the acquisition of the Bucyrus distribution business in Sime Darby Industrial Caterpillar dealership territories in December. This represents an opportunity to grow our presence in the region and also expand our leading position in our territories in Australia. The addition of the former Bucyrus product line will create new profit opportunities for the Division and we expect the transaction to be accretive to earnings by the fourth quarter of FY/2012. He also assured that the disposal of the Sime Darby Engineering (SDE) fabrication yards remains on track and is targeted to be completed by the end of this financial year. In view of the recent concerns over the performance of Malaysian palm oil downstream players, he stated that the Division has been intensifying its efforts to rationalise and strengthen the processes in its downstream operations. Our main focus is on prudent cost management and enhancing plant efficiency as well as productivity. We also have a pipeline of planned investments to diversify our product range into higher-margin speciality products.

4 The Bear Case Potential Risks As of now, the main challenge will be economy uncertainty. Management Management and Institutional Investors are AMANAHRAYA TRUSTEES-SKIM AMANAH SAHAM BUMIPUTERA, EPF and PNB are the major shareholder. Holding/Buying Stock Compensation - Pay for performance Reasonable compensation Red Flags Character Running the business I - Importance; R - Rating Were executives given loans that were subsequently forgiven? Do executives get perks for by the company that they should really be paying for themselves? Does management hog most of stock options granted in a given year, or do Rank-and-File employees share in the wealth? Does management use stock options excessively? If a founder or large owner is still involved in the company, does he or she also get a big stock option grant each year? Do executives have some skin in the game? Does management use its position to enrich friends and relatives? Is the board of directors stacked with management's family members or former managers? Is management candid about its mistakes? How promotional is management? Can the CEO retain high-quality talent? Does management make tough decisions that hurt results, but give a more honest picture of the company? Performance Follow-through Candor Self-confidence Flexibility Good rmal Bad Important Neutral t Important

5 Market Timing Criteria - Value Investing Buy Criteria Criteria 1. The current quarter's EPS is up more than 15% from the same quarter the year before. 2. Price is below DCF Intrinsic Value 3. Current EY% or Rolling 4Q EY% > 6% 4. Current DY% or Rolling 4Q DY% > 6% 5. Stock price breaks out of consolidation/dip on an uptrend. 6. Comparison of P/B ratio (for Financial stocks only) 7. Company owner, EPF, Khazanah and PNB heavily buying VI Remarks Sell Criteria Criteria 1. Current EY% or Rolling 4Q EY% < 6% for more than 2 years 2. Current DY% or Rolling 4Q DY% < 6% for more than 2 years 3. Quarterly EPS drop for 5 consecutive months 4. Fundamental of business turns unattractive or 5. Found a better opportunity to replace this stock 6. The stock drops near to my average cost or hit my stop loss 7. Long term trend changed from bullish to bearish 8. Company owner, EPF, Khazanah and PNB heavily selling. 9. Did I make a mistake? 10. Has the stock risen too far from its intrinsic value? VI Remarks Important Neutral t Important Ignore

6 Valuation Analysis Valuation Analysis: The stock is over-valued because its fair value is Valuation Methods That Applicable: Discounted Cash Flow Graham Valuation Estimated by Forecast EPS and PE Earning Yield Dividend Yield Price-to-book Ratio Discounted Cash Flow Valuation 3-Y 5-Y 10-Y Fair Value Actual M.O.S. -133% -121% -106% Buy Under Selection P 3-Y: Fast-growing company; operates in highly competitive, low margin industry 5-Y: Solid company; operates with advantage such as strong marketing channels, recognizable brand name, or regulatory advantage 10-Y: Outstanding growth company; operates with very high barriers to entry, dominant market position or prospects Current EY% or Rolling 4Q EY% > 6% CU EY%: 6.29 R-4Q EY%: 7.01 Current DY% or Rolling 4Q DY% > 6% CU DY%: 3.10 R-4Q DY%: 3.10

7 Discounted Cash Flows Valuation 16 Shares Out. M. O. S. Growth % Market risk premium 14 Risk free rate Discount % Terminal % FCF Excess Cash Intangibles Assets Intangibles% add to DCF Decay Rate (Yr4E-Yr7E) Extra Decay (Yr8E-Yr10E) Default Value % 8% 7.73% 3.43% 12% 2% % 8% 15% Custom Value 0.00% Projection of Future Free Cash Flow Yearly Growth % 1, , , , , , , , , , Y Valuation 5-Y Valuation 10-Y Valuation Discounted Perpetuity Value 15, Discounted Perpetuity Value 14, Discounted Perpetuity Value 10, Present Value 25, Present Value 26, Present Value 28, Shares Outstanding Shares Outstanding Shares Outstanding Fair Value 4.27 Fair Value 4.49 Fair Value 4.82 Desired M.O.S. 20% Desired M.O.S. 20% Desired M.O.S. 20% Buy Under 3.41 Buy Under 3.59 Buy Under 3.86 Current Price 9.93 Current Price 9.93 Current Price 9.93 Actual M.O.S. -133% Actual M.O.S. -121% Actual M.O.S. -106%