HLG: Sime Darby - Results in-line, but headwinds in FY09 (27 August 2008)

Sime Darby Berhad BUY



Price target RM7.50



Share price at 26 August RM6.45



Investment summary


Full-year FY08 earnings were within HLG/market expectation. Our BUY rating is premised largely on Sime’s valuation gap to comparable big-cap peers: 11x FY09E PE compares to 14-17x for sector leaders IOI/Wilmar; 6% net DY is sector-leading, and compares to 1% for IOI. However, we admit that the outlook for EPS growth is poor, given the cyclicality of non-plantation earnings and the lack of catalysts following the collapse of the Bakun deal.

From a broader investment standpoint, our current plantation strategy is to play short-term technical movements via IOI, which we see as a closer proxy to CPO prices than Sime. We are long-term bearish on CPO prices, given its close correlation to crude oil prices and the lack of immediate clarity as to how low crude oil prices can go in a global economic slowdown.



Grossly oversold

EPS outlook has deteriorated, given the collapse of the Bakun transmission deal, cyclical non-plantations earnings and sharp decline in CPO prices. However, we think that Sime has still been oversold relative to IOI/KLK, and this is largely due to how well-owned it was prior to its Nov07 restructuring.