Sime Darby - Plans expansion into Liberia and East

Sime Darby is looking to develop plantations in Africa and plans to build new palm oil processing plants in eastern Europe to exploit booming edible oil demand.

In Liberia (Africa), the concession that was offered to Sime was about 200,000 acres for rubber but Sime is looking at potential for rubber plus palm oil.

For the new processing plants in eastern Europe, Sime has short-listed three countries in eastern Europe to site its downstream palm oil units which could include refineries and margarine plants. Palm oil is used in the production of cooking oil and in products ranging from cosmetics to cookies and biofuels. (Source: Business Times)

Comments:

Neutral in the short term. While Sime's plan to expand its plantation size is a good strategic move, we are unable to comment as to whether venturing into Liberia is a good move for now, given our limited knowledge of the country including weather and soil conditions, and work ethics of local plantation workers. In addition, there are country and currency risks to contend with.

As for its processing plants in eastern Europe, it remains to be seen if setting up downstream units there is a good strategic move given the high transportation costs (to transport refined palm oil to Eastern Europe from Asia), high start up costs and the business itself, which has low margins.

Maintain target price and earnings forecasts for Sime. We are maintaining our Hold call and target price of RM10.80 based on CY09 EPS pending clarification from management.