Sime Darby Berhad BUY
Price target RM13.80
Share price at 27 Feb RM12.00
Investment summary
H108 earnings were slightly below consensus, but we believe results are immaterial to big-cap plantation share prices: instead, we think share prices are immediate leveraged proxies to CPO prices. Despite imperfect exposure to CPO prices (plantations account for just 70% of Sime’s earnings), Sime has grossly under-performed KLK/IOI during the recent RM3000/mt to RM3,600/mt run-up in CPO prices. We spot an arbitrage opportunity, and raise our rating on Sime from a HOLD to a BUY. We are neutral on the plantation sector, and advocate switching fro IOI/KLK to small/mid cap planters such as Kulim, which offer better value/yield. Given the tight global supply of edible oil and grain, we expect CPO price to stay firm in the next 6 months.
Laggard; upgrade to BUY
Share price has been flat-line vs. 7-30% YTD gains at regional big cap peers. Though Sime is an imperfect plantation play due to its diversified structure, the scale of under-performance is undeserved, especially as positive newsflow on Bakun makes its way to the market.
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Tuesday, 4 March 2008
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