China government to take-up 10% of Sime? On Bloomberg news, Second Finance Minister denied news (also on Bloomberg) that a 10%-stake in Sime is being offered to parties related to the Chinese government via issue of new shares. Subsequently, The Edge reported that the matter has already been discussed and approved by the Cabinet.
· Impact on operations/finances. A potential deal will enable Sime access to investment opportunities in the high growth China market, with prime acquisition targets likely in the downstream sector (i.e. refineries). In a scenario analysis, potential sale of 10% in Sime via new shares assuming a 0-10% discount to market price would raise M$4.6-5.1B, which is 65-70% of the M$7B budgeted capex in FY10E. This would cut FY10E net gearing from 21% to 0%, and result in 6.5-6.7% EPS dilution assuming no immediate contributing acquisitions. Sime’s downstream segment incurred a loss of M$173MM in FY09. Hence we believe execution is still crucial in any acquisitions in this area.
· Impact on valuations: A comparison with Wilmar (China agri-play). At 17x CY10E PE, Sime already trades almost at par with Wilmar (Figure 1 & 2). Wilmar is also a larger company with a much more focused agri-business strategy, while Sime continues to lack focus. China also accounts for 49% of Wilmar's earnings versus just 3% for Sime. Hence, we believe much of the potential good news if at all is priced-in, and further upside potential from here hinges on the value-add in terms of synergistic and/or earnings accretive acquisition opportunities which a potential deal may offer.
· Maintain Neutral. We assume CPO prices at M$2,450/t (spot: M$2,200/t) for 2H09-2010E. We believe a clearer, more immediate valuation upside is further improvement in plantations profitability after operational set-backs in FY09. Our Jun-10 SOTP-based PT for Sime is M$8.70. This could rise to M$9.30 (under similar methodology as our base case) if CPO yields and cost normalize to FY08 levels.
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