9MFY17 results below expectations SIME s 9MFY17 core net profit of RM1.58bn (+64.2% yoy) came in below expectations. The variance was mainly due to a lower-thanexpected contribution from the property and industrial divisions. SIME s proposed listing of its plantation and property businesses is on-track and is expected to be completed by end-2017. We are cutting our FY17-19 core EPS forecasts by 11-12% to account for the weak 9MFY17 results. As we still expect yoy growth in FY17-19 earnings, we raise our SOTP derived 12-month target price on SIME to RM9.03, after we roll forward our valuation basis to 2018. Maintain HOLD. Lower core net profit of RM632m in 3QFY17 Sequentially, Sime Darby s (SIME) 3QFY17 revenue was higher marginally by 1% qoq to RM12.45bn, on a stronger contribution from the plantation, property, industrial and logistics segments, partially offset by a decline in contribution from motors. The EBITDA margin improved to 11.2% as compared to 11% in 2QFY17, mainly due to higher earnings from the plantation division given the better CPO ASP of RM3,088/MT in 3QFY17 from RM2,835/MT in 2QFY17. However, SIME s core net profit, after excluding one-off items, declined by 16.1% qoq to RM632m. 9MFY17 results below expectations SIME s 9MFY17 revenue and net profit increased by 8.2% and 40.4% yoy respectively to RM34.88bn and RM1.79bn. The increase in profit was mainly due to the higher contribution from the plantation (higher CPO ASP of RM2,861/MT vs RM2,113/MT in 9MFY16 but partially mitigated by weaker FFB production by 2.4%) and motors (higher contribution from Malaysia, China/HK and New Zealand as well as a gain on the disposal of an investment property in HK). Meanwhile, lower profit contributions were seen from industrial (due to lower engine deliveries to the O&G and marine sectors in Singapore), property (less construction work being completed and lower gains on the disposal of land, shares and Sime Darby Property [Alexandra]) and logistics (due to lower throughput at Jining ports but partially mitigated by higher water consumption and higher throughput in Weifang port). After excluding gains on disposals and other one-off items, the 9MFY17 core net profit increased by 64.2% yoy to RM1.58bn, which was below expectations, accounting for 66% of our previous FY17 forecast and 68% of the consensus forecast. The variance was due to a lower-thanexpected contribution from the property and industrial divisions. Earnings & Valuation Summary FYE 30 Jun 2015 2016 2017E 2018E 2019E Revenue (RMm) 43,728.7 43,962.8 45,586.8 46,944.8 47,739.8 EBITDA (RMm) 4,770.3 4,192.3 4,653.9 5,267.3 5,600.4 Pretax profit (RMm) 3,145.4 2,815.8 3,050.9 3,714.3 4,063.2 Net profit (RMm) 2,430.0 2,408.8 2,136.7 2,640.9 2,906.0 EPS (sen) 39.1 38.1 32.2 39.8 43.7 PER (x) 23.8 24.5 29.0 23.4 21.3 Core net profit (RMm) 2,196.2 1,786.1 2,136.7 2,640.9 2,906.0 Core EPS (sen) 35.4 28.2 32.2 39.8 43.7 Core EPS growth (%) (23.2) (20.2) 13.9 23.6 10.0 Core PER (x) 26.4 33.0 29.0 23.4 21.3 Net DPS (sen) 25.0 27.0 30.0 30.0 30.0 Dividend Yield (%) 2.7 2.9 3.2 3.2 3.2 EV/EBITDA (x) 15.0 17.0 16.1 14.4 13.5 Results Note Sime Darby SIME MK Sector: Plantation RM9.32 @ 31 May 2017 HOLD (maintain) Downside: 3% Price Target: RM9.03 Previous Target: RM8.61 (RM) 10.00 9.50 9.00 8.50 8.00 7.50 7.00 6.50 6.00 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Price Performance 1M 3M 12M Absolute -0.1% 4.0% 25.8% Rel to KLCI 0.0% -0.2% 15.8% Stock Data Issued shares (m) 6,800.8 Mkt cap (RMm)/(US$m) 63383.8/14807.6 Avg daily vol - 6mth (m) 9.18 52-wk range (RM) 7.3-9.55 Est free float 30.8% BV per share (RM) 5.48 P/BV (x) 1.70 Net cash/ (debt) (RMm) (3Q17) (11,063) ROE (FY17E) 6.6% Derivatives No Shariah Compliant Yes Key Shareholders Skim ASB 40.4% EPF 9.7% Yayasan Pelaburan Bumiputra 6.1% Source: Affin Hwang, Bloomberg Nadia Aquidah (603) 2146 7528 nadia.subhan@affinhwang.com Chg in EPS (%) -10.5-11.5-11.6 Affin/Consensus (x) 0.9 1.0 1.0 Source: Company, Affin Hwang estimates, Bloomberg Page 1 of 5
Update on proposed listing of plantation and property businesses To recap, SIME has announced a plan to create three stand-alone businesses: plantation, property and trading & logistics. SIME has also proposed to undertake an internal restructuring of Sime Darby and its subsidiaries, involving the restructuring of the borrowings of the Group, the transferring of certain assets including land within the Group and the capitalisation of inter-company loans. Recently, SIME has received an approval from bondholders to restructure the US$800m Sukuk, and Sime Darby Plantation has received corporate ratings of Baa1 and BBB+ from Moody s and Fitch Ratings, respectively, with a stable outlook. According to SIME, the proposed listing of the plantation and property businesses is on track and is expected to be completed by end-2017. The distribution of the prospectus is expected to be in November, followed by the listing in December. Maintain HOLD rating with new TP of RM9.03 We are cutting our FY17-19 core EPS forecasts by 11-12% to account for the weak 9MFY17 results, especially in the property and industrial divisions. As we still expect yoy growth in FY17-19 earnings, we raise our SOTP derived 12-month target price on SIME has to RM9.03 from RM8.61, after we roll forward our valuation basis to 2018. This is based on unchanged multiples of 25x our 2017E EPS for its plantation division, 14x for its property division, 24x for its industrial division, 10x for its motor distribution division and 10x for its logistics division. As there is 3% downside potential to our new TP, we maintain our HOLD rating on SIME. Key risks Key upside risks to our HOLD rating include: (i) a significant recovery in global economic growth and/or favourable policies in its key markets boosting demand for core products and services; and (ii) lower-thanexpected production of vegetable oils and/or changes in regulations boosting CPO prices. Key downside risks include a deterioration in the global economic outlook, and a significant decline in CPO and crude oil prices. Page 2 of 5
Fig 1: Results comparison FYE 30 June 3QFY17 (RMm) QoQ YoY 9MFY17 YoY Comments Revenue 12,446.0 0.9 21.6 32,884.0 2.0 3QFY17: stronger yoy contribution from the plantation, industrial, logistics and motors, partially offset by a decline in contribution from property. Op costs (11,049.0) 0.6 19.7 (29,249.0) 0.0 EBITDA 1,397.0 3.3 39.0 3,635.0 21.5 EBITDA margin (%) 11.2 +0.3ppt +1.4ppt 11.1 +1.8ppt Better yoy mainly due to higher contribution from plantation division. Depn and amort (470.0) 4.9 4.6 (1,349.0) 0.5 EBIT 927.0 2.4 66.8 2,286.0 38.6 Int expense (69.0) 19.0 (39.3) (220.0) (46.1) Int and other inc 54.0 3.8 9.5 155.0 28.8 Associates 28.0 (71.7) 37.3 130.0 >100 Exceptional items 67.0 n.m (76.0) 206.0 (33.5) Mainly attributable to impairments, write-down of inventory, forex gain and gain on disposal of subsidiaries and investment properties. Pretax profit 1,007.0 9.3 27.3 2,557.0 48.1 9MFY17: Increase in profit was mainly due to higher contribution from plantation (higher CPO ASP of RM2,861/MT, partially mitigated by weaker FFB production by 2.4%) and motors (higher contribution from Malaysia, China/HK and New Zealand as well as a gain on the disposal of an investment property in HK). Meanwhile, lower profit contributions were seen from industrial (due to lower engine deliveries to O&G and marine sectors in Singapore), property (less construction work being completed and lower gains on disposal of land, shares and Sime Darby Property (Alexandra)) and logistics (due to lower throughput at Jining ports). Core pretax 940.0 (5.8) 83.7 2,351.0 65.9 Tax (234.0) 7.8 >100 (582.0) 69.2 Tax rate (%) 23.2-0.3ppt +10.7ppt 22.8 +2.8ppt Lower than the statutory rate due to gain on disposal of Sime Darby Property (Alexandra), which was not subjected to tax, as well as the recognition of the Indonesian special tax incentive and overprovision of tax in prior years. MI (74.0) >100 >100 (189.0) 70.3 Net profit 699.0 3.4 5.5 1,786.0 40.4 EPS (sen) 10.3 6.2 (1.9) 27.1 33.2 Core net profit 632.0 (16.1) 64.8 1,580.0 64.2 Adjusted for exceptional items below expectations. Source: Company data, Affin Hwang estimates Page 3 of 5
Fig 2: Quarterly revenue breakdown FYE 30 June (RMm) 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Plantation (incl. Downstream) 2,659.9 3,382.1 2,737.0 3,097.5 2,791.0 3,910.0 4,070.0 Property 632.0 548.0 714.6 970.3 434.0 421.0 588.0 Industrial 2,385.0 2,459.0 2,373.0 2,400.5 2,164.0 2,354.0 2,727.0 Motors 4,411.0 5,336.0 4,335.9 4,841.5 4,629.0 5,559.0 4,974.0 Logistics 71.0 77.0 69.0 412.2 70.0 75.0 77.0 Others 14.0 27.0 (2.0) 11.3 11.0 20.0 3.0 Unallocated corporate expenses 0.2 (0.2) 5.5 (5.3) 0.0 0.0 7.0 Total 10,173.1 11,828.9 10,232.8 11,728.0 10,099.0 12,339.0 12,446.0 Source: Company data Page 4 of 5
Equity Rating Structure and Definitions BUY Total return is expected to exceed +10% over a 12-month period HOLD Total return is expected to be between -5% and +10% over a 12-month period SELL Total return is expected to be below -5% over a 12-month period NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months. OVERWEIGHT Industry, as defined by the analyst s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analyst s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analyst s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) ( the Company ) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) A Participating Organisation of Bursa Malaysia Securities Berhad 22nd Floor, Menara Boustead, 69, Jalan Raja Chulan, 50200 Kuala Lumpur, Malaysia. T : + 603 2146 3700 F : + 603 2146 7630 research@affinhwang.com Page 5 of 5