Company Note Company Update Monday, 13 August 2007 For Internal Circulation Only KLCI : 1,287.70 Sector : PLANTATIONS 13 Aug 2007 Bloomberg : SDY MK Analyst : James Ratnam E- : james@ta.com.my : 20721277 ext 1324 Sime Darby Berhad Meet The Enlarged Sime Darby. Target Price Raised to RM12.40. As been widely speculated, Synergy Drive was renamed as Sime Darby yesterday. We highlight below some key points of the enlarged Sime Darby group. Listing on Nov 30 The group, after a year ago from the first announcement, an amalgamation of Permodalan Nasional Berhad owned plantation companies is all set for listing on Nov. 30. Sime Darby would also claim the throne as the largest market capitalisation stock on Bursa Malaysia upon its listing. At listing reference price of RM8.90, the market capitalisation is about RM54bn, accounting for approximately 7.3% of the KLCI adjusted total market capitalisation. Table 1: KLIC Top 5 Component Stocks by Market Cap (Post-Synergy Drive Listing) Name Share cap Last Price Market cap % Weight in (mn) (RM) (RMmn) the Index Synergy Drive 6,024.4 * 8.90 53,617.2 7.3 Malayan Banking Bhd 3,895.3 11.60 45,186.0 6.2 IOI Corp Bhd 5,991.6 6.90 41,341.8 5.6 Tenaga Nasional Bhd 4,332.4 9.00 38,991.6 5.3 Telekom Malaysia Bhd 3,439.8 10.90 37,493.9 5.1 * Share cap immediately after listing Source: Bloomberg, TA Securities Core Business Synergy Drive is essentially a much larger Sime Darby that is a conglomerate with business interest in plantation, property, heavy equipment, motor and energy & utilities. The only difference is plantation business would be the largest earnings contributor, accounting for 33% and 67% of FY08 group earnings respectively. In fact, it will be the largest plantation company in the world, accounting for approximately 5% of global CPO production. EARNINGS SUMMARY (RMm) YE 31 Dec 2006 2007 2008E 2009F 2010F Revenue 24,922.0 28,220.4 30,880.0 32,565.5 34,020.6 EBITDA 3,085.7 3,459.8 5,244.3 5,823.3 5,869.3 EBITDA margin (%) 12.4 12.3 17.0 17.9 17.3 Pretax profit 2,472.5 3,604.3 4,659.8 5,340.4 5,432.0 Net profit 1,780.2 2,706.8 3,425.0 3,978.6 4,074.0 Core net profit 1,725.3 1,953.3 3,322.2 3,859.2 3,951.8 EPS (sen) 28.3 43.2 54.6 63.4 64.9 Core EPS (sen) 28.3 32.1 54.6 63.4 64.9 Core EPS growth (%) na 13.2 70.1 16.2 2.4 PER (x) 31.4 27.7 16.3 14.0 13.7 GDPS (sen) 23.0 25.0 32.0 38.0 38.0 Div yield (%) 2.6 2.8 3.6 4.3 4.3 Sime Darby Berhad [ 1 ] Company Update Company Note
Chart 1 (a): FY07 Revenue and Operating Profit Breakdown 25% 24% Revenue 29% Property 6% 17% Operating Profit 3% 5% 17% Property 14% 44% Source: Sime Darby 23% 23% Source: TA Securities Revenue Chart 1 (b): FY08 Revenue and Operating Profit Breakdown 32% Property 6% 5% Property 14% Operating Profit 5% 1% 67% Table 2: Comparison With Other Major Companies Synergy Drive IOI Corp KLK Wilmar Asiatic Total planted area 524,626 148,871 123,462 66367 59968 Mature area (ha) 477,540 139,798 100,998 55318 53968 FFB Yield (tonnes per ha) 19.4 26.72 24.15 21.2 21.4 CPO Production ('000 tonnes) 2,110,146 793,452 692,165 831,209 250,307 OER (%) 22.81 21.33 20.50 20.9 20.52 Source: Annual Reports, Sime Darby Riding on CPO Price Rally We estimate FY08 net profit could increase 70% to RM3.3bn from a proforma FY07 core net profit of RM2.0bn. A bulk of this growth is attributable to CPO price rally. YTD FY08 average market CPO price of RM2,698 per tonne is already some 41% higher compared with the RM1,918 per tonne for the whole of FY07. We estimate a RM100 per tonne increase in CPO price would boost Sime Darby's EPS by 3%. Sime Darby Berhad [ 2 ] Company Update Company Note
US$ per tonne 1000 900 800 700 600 500 400 300 200 100 0 Chart 2: CPO Price at Record High 31-Jan-1997 31-Dec-1997 30-Nov-1998 29-Oct-1999 29-Sep-2000 31-Aug-2001 31-Jul-2002 30-Jun-2003 31-May-2004 29-Apr-2005 31-Mar-2006 28-Feb-2007 Table 3: Effect on PAT for a RM100 change in CPO Price FY08 FY09 Base Revised % chg Base Revised % chg PAT PAT PAT PAT Synergy Drive 3,322 3,436 3.4 3,859 3,981 3.2 IOI Corp 2,208 2,264 2.5 2,369 2,426 2.4 KLK 1,021 1,085 6.3 1,077 1,142 6.1 United Malacca 75 77 3.4 90 92 3.2 Source: TA Securities Source: Bloomberg Synergistic Benefit May Take Time Management estimates the merger synergy could result EBIT improvement to the tune of RM400 - RM500 p.a., although RM100mn to RM200mn cost savings is a more realistic medium term target, in our view. Bulk of these targeted cost savings would be derived from the plantation division. Estate consolidation - RM100mn - RM150mn p.a. This would be achieved via consolidation of individual estates in the same vicinity, rationalise management and labour elements of estate operation as well as optimising milling capacity usage. Adoption of best practices - RM60mn - 80mn p.a. by capitalising on key personals from best performing estates to upgrade the under-performing estates. Management is confident this measure could result in significant improvement in yield, although no comparative data for analysis was provided. Fertiliser procurement - RM40mn - 50mn p.a. via standardisation of procurement system, bulk discount and transportation cost. Milling usage optimisation - RM20mn p.a. from consolidation and reorganisation of milling operation. We have conservatively assumed cost savings of RM100mn in FY08 and RM200mn in FY09. The impact on earnings and target price on various cost savings is given in the table below. Table 4: Cost Savings Sensitivity Analysis Cost savings (RMmn) 0 100 200 300 400 500 (base case) FY09 net profit (RMmn) 3,714.7 3,787.0 3,859.2 3,931.5 4,003.8 4,076.0 % change -3.7-1.9 0.0 1.9 3.7 5.6 Target price (RM) 11.80 12.10 12.40 12.66 12.94 13.22 Good Mixture of Management Team The group has tapped into the talent pool of the individual component companies to fill up the key management positions. We view this positively as it would ensure operation continuity and eases cultural integration process. The full list of the management team is given in Appendix 1. To compensate for the status quo on the managerial level, the board of directors is stuffed with fresh blood, combining local and foreign expertise from various professional backgrounds. Among the prominent members include Dr. Ariffin Siregar (Chairman of PT Medco Energi and former governor of bank Indonesia), Datuk Seri Andrew Shang (former Bank Negara assistant governor and chairman of the Hong Kong Securities and Futures Commission). Sime Darby Berhad [ 3 ] Company Update Company Note
The board will be led by Tun Musa Hitam, former deputy prime minister and former Chairman of Guthrie). The appointment of Tun is positive as well, in our opinion, as he is viewed as independent and a professional. His prior experience as the Chairman of Guthrie from mid-2002 to June 2006, presiding during the group's crucial turnaround period would come in handy with his new portfolio. Bumper Earnings Growth Ahead We forecasts core net profit to grow by 70.1% in FY08 and another FY16.2% in FY09, translating into 3-year net profit CAGR of 30.. The underlying assumptions to derive at the earnings forecasts are given below. Table 5: Assumptions Used in Earnings Forecasts FY07 FY08E FY09F FY10F Matured area (ha) 477,540 484,103 491,031 496,221 Average mature area (ha) 477,540 480,821 487,567 493,626 FFB production (tonnes) 9,252,585 9,543,270 10,039,424 10,836,997 FFB processed (tonnes) 9,869,577 10,191,112 10,719,658 11,551,242 CPO production (tonnes) 2,110,146 2,210,400 2,331,022 2,507,352 Palm kernel production (tonnes) 492,753 504,996 528,195 559,181 OER (%) 22.8 23.2 23.2 23.1 FFB yield (tonnes per ha) 19.4 19.8 20.6 22.0 Assumed selling prices (RM per tonne): C P O 2,700 2,750 2,650 Palm kernel 1,200 1,260 1,323 Source: Prospectus, TA Securities RM12.40 Target Price. Buy Sime Darby Following the upgrade in CPO price assumption to RM2,800 per tonne in CY2008 and RM2,700 per tonne in CY2009, we have upgraded Sime Darby's FY08 and FY09 earnings by 23% and 30% respectively. Further, we change valuation methodology to Sum-of-Parts from PER to value Sime Darby, given interest in five various core businesses. Using SOP method, we derive at a target price of RM12.40, or equivalent to 19.6x FY09 PER. We pegged a fair PER of 20x for its plantation division, a premium to 5- year sector average PER of 17x to reflect CPO price up-trend and potential incremental earnings effect from synergistic cost savings. Other sectors' valuation is based on the respective sector average and an assumed 10x PER for the trading segment. Note that we have imputed a 15% index premium as Sime Darby will be the largest KLCI component stock post listing. For a potential upside of 39.3%, Buy Sime Darby. Table 6: Sum-of-Parts Valuation Table FY09 est. PAT Multiple Segment value (x) (RMmn) 2,580.0 20.0 51,599.8 Oil & Fats 32.3 10.0 323.2 Property 268.6 13.0 3,492.4 160.0 13.0 2,079.8 equipment 461.2 13.0 5,995.3 vehicle 182.0 10.0 1,820.3 32.0 10.0 319.9 Equity value 65,630.7 Enlarged share capital (mn) 6,086.0 Equity value per share (RM) 10.78 Index premium 15.0% Target Price (RM) 12.40 FY09 PER (x) 19.6 Source: TA Securities Sime Darby Berhad [ 4 ] Company Update Company Note
P&L Summary YE June 30 2006 2007 2008E 2009F 2010F Revenue 24,922 28,220 30,880 32,565 34,021 Operating profit 2,566.8 2,912.2 4,645.6 5,232.6 5,292.6 Finance cost (300.1) (312.4) (329.1) (318.1) (307.1) Interest + inv. Income 117.3 213.5 224.1 235.4 247.1 Associate + JV 88.5 112.4 119.1 126.3 133.9 Forex 0.0 74.0 0.0 0.0 0.0 EI 0.0 604.6 0.0 0.0 0.0 Pretax profit 2,472.5 3,604.3 4,659.8 5,340.4 5,432.0 Taxation (692.3) (897.5) (1,234.9) (1,361.8) (1,358.0) Tax rate 28.0% 24.9% 26.5% 25.5% 25.0% Profit after tax 1,780.2 2,706.8 3,425.0 3,978.6 4,074.0 MI (54.9) (74.9) (102.7) (119.4) (122.2) PAT 1,725.3 2,631.9 3,322.2 3,859.2 3,951.8 Core net profit 1,725.3 1,953.3 3,322.2 3,859.2 3,951.8 Reported EPS - basic 28.3 43.2 54.6 63.4 64.9 Core EPS - basic 28.3 32.1 54.6 63.4 64.9 Core EPS - fully diluted 28.3 32.1 54.6 63.4 64.9 Valuation PER (x) 31.4 27.7 16.3 14.0 13.7 EV/EBITDA 15.4 9.8 8.6 3-YEAR EPS CAGR 30.8 26.5 P/NTA (x) 2.8 2.6 2.4 2.3 Core ROE 10.1 16.6 18.0 17.2 Core ROA 5.8 9.7 10.7 10.4 Balance Sheet Summary YE June 30 2007 2008E 2009F 2010F Fixed assets 7,671.0 8,118.4 8,535.5 8,924.4 Investment properties 159.1 159.1 159.1 159.1 Biologiacl assets 3,318.9 3,318.9 3,318.9 3,318.9 Land held for prop dev 1,650.9 1,650.9 1,650.9 1,650.9 Inv in assoc + JV 922.3 1,041.4 1,167.7 1,301.6 Goodwill 67.9 67.9 67.9 67.9 Prepaid lease rental 652.1 652.1 652.1 652.1 Deferred tax assets 718.7 718.7 718.7 718.7 513.9 513.9 513.9 513.9 Total LT Assets 15,674.8 16,241.3 16,784.7 17,307.5 Inventories 4,519.8 4,817.3 5,080.2 5,307.2 Receivables 5,040.1 5,558.4 5,861.8 6,123.7 Cash & bank balance 6,088.6 6,440.5 7,137.6 7,925.7 2,098.8 2,098.8 2,098.8 2,098.8 Current Assets 17,747.3 18,915.0 20,178.4 21,455.4 TOTAL ASSETS 33,422.1 35,156.3 36,963.1 38,762.9 Payables 5,797.0 6,299.5 6,643.4 6,940.2 Borrowings 2,399.3 2,353.2 2,273.2 2,193.2 Taxation 330.2 330.2 330.2 330.2 466.0 466.0 466.0 466.0 Current liabilities 8,992.5 9,448.9 9,712.8 9,929.6 Share capital 3,043.0 3,043.0 3,043.0 3,043.0 Reserves 16,261.8 17,590.7 19,134.4 20,715.1 Shareholders' funds 19,304.8 20,633.7 22,177.4 23,758.1 MI 477.0 579.7 699.1 821.3 LT borrowings 3,683.7 3,529.8 3,409.8 3,289.8 Deferred tax 917.5 917.5 917.5 917.5 46.6 46.6 46.6 46.6 Total LT liabilties 14,117.3 14,522.6 14,785.8 15,004.8 TOTAL LIABILITIES 33,422.1 35,156.3 36,963.1 38,762.9 NTA/share (RM) 3.16 3.38 3.63 3.89 Sime Darby Berhad [ 5 ] Company Update Company Note
Cash Flow Summary YE JUNE 30 2007 2008E 2009F 2010F Pretax profit 3,571.1 4,659.8 5,340.4 5,432.0 Net interest 30.1 104.9 82.7 59.9 Depreciation 609.3 552.6 582.9 611.1 Associate (112.4) (119.1) (126.3) (133.9) (334.5) 0.0 0.0 0.0 CFO b4 WC 3,763.6 5,198.2 5,879.7 5,969.1 Working capital (116.6) (313.3) (222.5) (192.1) Interest expense (298.7) (329.1) (318.1) (307.1) Tax paid (723.2) (1,234.9) (1,361.8) (1,358.0) CFO 2,625.1 3,321.1 3,977.3 4,112.0 Capex (1,406.2) (1,000.0) (1,000.0) (1,000.0) Interest income 186.0 224.1 235.4 247.1 1,360.8 0.0 0.0 0.0 CFI 140.6 (775.9) (764.6) (752.9) Net borrowings (286.7) (200.0) (200.0) (200.0) Dividend paid (1,114.2) (1,993.3) (2,315.5) (2,371.1) 415.3 0.0 0.0 0.0 CFF (985.6) (2,193.3) (2,515.5) (2,571.1) Forex 0.0 0.0 0.0 0.0 Net generated / (used) 1,780.1 351.9 697.2 788.1 Beginning cash 4,308.5 6,088.6 6,440.5 7,137.6 Ending cash 6,088.6 6,440.5 7,137.6 7,925.7 DISCLAIMER The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. for TA SECURITIES HOLDINGS BERHAD Yaw Chun Soon, Executive Director - Operations TA Securities Holdings Berhad (14948-M) (A Participating Organisation of Bursa Malaysia Securities Berhad) Menara TA One, 22 Jalan P Ramlee, 50250 Kuala Lumpur. Malaysia Tel : 603-2072 1277. Fax : 603-2032 5048 Sime Darby Berhad [ 6 ] Company Update Company Note