Sime Darby Berhad: The China angle to provide the next up-leg?

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.

Sime Darby - Revised Ramunia Offer for Cash

Price: RM8.23
Target Price: RM6.20
Recommendation: TRADING SELL

· RM560m cash for Ramunia’s yard. Sime Darby’s final offer for Ramunia’s 170 acres fabrication yard will be settled entirely by RM560m cash and the acquisition is expected to be completed by end 2009. We believe the acquisition price of RM75.6/ft2 which is 32% above the net book value of RM425m@RM57.4/ft2 is fair given the yard’s superior sea frontage.
· Slightly better offer. The final offer is slightly better than the previous offer of c.RM554m which includes RM232m offer and transfer of Ramunia’s net debt of RM332m (as of 30 Jan 09). The previous RM232m offer is to be part settled by RM46.2m cash and RM185.5m worth of new shares in Sime Darby Engineering (“SDE”). Current final offer translates into c.RM1/share (or RM0.58/share on a fully diluted basis for Ramunia).

· Ramunia to seek new business. Post disposal of its yard, Ramunia may be classified as affected issuer under PN16 as a “cash company” and PN17 for disposal of its major assets. Ramunia therefore needs to seek a new business with its net cash of c.RM292.2m after the disposal to maintain its listing status.

· Medium term earnings positive for Sime. Post acquisition, SDE will emerge as the largest fabricator in Malaysia as the acquisition will enlarge SDE’s yard space to 284 acres from 114 acres, while its yard capacity will almost double to 105,000MT from 55,000MT. Earnings impact however would only be felt in late FY10 as SDE expands its order book by bidding for more O&G fabrication projects.

· Maintain Trading Sell on Sime with unchanged target price of RM6.20. Buoyed by the positive market sentiment, Sime is currently trading at a pricey FY10 PER of 21.4x. Risks we suspect is biased to the downside should the market experience a correction.

Sime Darby - BUY - 29 May 2008

Sime Darby - 9MFY08 results largely within expectations (Results Note)



Price: RM9.25

Target Price: RM12.90

Recommendation: BUY



· 9MFY08 core net profit of RM2,464.2m was largely within expectations at 70% of our earnings estimate of RM3,501.1m and 69% of consensus estimate of RM3,584.1m. Revenue, EBIT and pretax profit were all largely within expectations at between 75% and 78% of our full year estimates.

· Beneficiary of higher CPO selling prices. 9MFY08 core net profit of RM2,464.2m was 96% higher YoY primarily due to higher average CPO selling price of RM2,744/MT which was 71% higher YoY. Motor vehicle segment turned around with 9MFY08 PBIT of RM182.1m on higher sales in every region and non-recurrence of inventory write downs.

· Not all segments fared well. Property (-22%), industrial (0%) and energy & utilities (-24%) segments recorded negative growth YoY. Property segment experienced slower sales due to higher price revisions and. the industrial segment experienced slower sales in Australia, its primary market, due to severe flooding. Energy & utilities segment was set back by start up costs.

· Commendable QoQ growth nonetheless. Despite the less than sterling performance at the property, industrial and energy & utilities segments, 3QFY08 core net profit of RM1,089.5m was still 49% higher QoQ due to higher average CPO selling price realised of RM3,101/MT in 3QFY08 versus RM2,625/MT in 2QFY08.

· No revision in earnings estimates. We foresee seasonally higher FFB/CPO production in 4QFY08 and sustained high CPO selling prices (currently at circa RM3,600/MT) easily making up, if not exceeding, the remaining 30% of our earnings estimates. We believe our earnings estimates are still achievable.

· Maintain BUY call and RM12.90 target price based on an unchanged 17.5x FY09E PER. We will revise our earnings estimate and target price upwards should CPO selling prices sustain at current levels. Our RM11.90 RNAV/share derived fair value and gross dividend yield of 3% to 4% imply limited downside risk.







KENANGA INVESTMENT BANK BERHAD (15678-H)

Sime Darby - RM1b EPCIC job from Petronas? (Maintain Hold, TP: RM9.65)

Sime Darby - RM1b EPCIC job from Petronas? (Maintain Hold, TP: RM9.65)

Over the weekend, it was reported that Sime Darby Engineering is believed to have secured the EPCIC (engineering, procurement, construction, installation, and commissioning) job for the central processing platform topside and jacket for Kumang, F9, Laho and Melor development projects worth RM1bn in total from Petronas Carigali. (Source: The Edge weekly)

Comments:
Limited yard space. With limited yard space, our O&G analyst thinks it is highly unlikely that Sime Darby Engineering will be awarded this RM1bn contract by Petronas Carigali Sdn Bhd.
Small impact, if any. Under a best case scenario whereby Sime was awarded the contract, assuming an 8% net profit margin to be recognized over a 2 year period, the net incremental yearly contribution to Sime is about RM40m p.a.. This is relatively small at slightly above 1% increment to Sime's FY08 and FY09 net profits of around RM3.5bn each year. Maintain Hold on Sime and unchanged target price of RM9.65 based on 17x CY09 EPS.

Sime Darby Berhad : Qatar oil and gas unit hit by cost overrun of M$150MM - ALERT

Sime Darby Berhad : Qatar oil and gas unit hit by cost overrun of M$150MM - ALERT


Over the weekend, The Edge Business Weekly reported that Sime's oil and gas unit in Qatar has run into some cost overruns due to rising material cost (namely steel) to the tune of M$150MM. This relates to the M$2.2B project or contract awarded to Sime for the construction and installation of a process platform, a utility platform, and three bridges in an oil and gas development in Qatar.

The report in the Edge also stated that Sime has earlier this month withdrawn a letter of award for sub-contracting works of the Qatar project to Ramunia. This was on the basis that Ramunia's offer price of US$48.3MM exceeded the proposed subcontracted amount of US$40MM.

The reported M$150MM cost overrun accounts for 4% of our FY08E net profit, and works out to just 2.5sen per share for Sime, which is hence not significant. Nevertheless, there are concerns that there may be more cost overruns of this nature given rising cost overall. We will check with management and feedback later.

Overall, the oil and gas division of Sime however currently makes up just 6sen per share or 0.5% of our Dec-08 price target of M$12.80 based on sum-of-the-parts (SOTP). The plantations division makes up the bulk of the SOTP value at over 70%, followed by the property and heavy equipment divisions. (See Table 4 on page 3 of our separate note on Sime Darby dated 13 April already released). Key risk to our price target is less favorable terms for the multi-billion Bakun hydro-electric project.

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.

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.

JPMorgan: 3 mar Sime (overweight)

Sime Darby now has the highest upside potential based on our price
target: In absolute terms, the stock has not done much since its first day
of re-listing in late November. Relative to the KLCI, Sime has outperformed
by 6% while KLK and IOI have outperformed by over 20%.

CPO prices have continued to head north, up 30% since late Nov. and
a further 13% in the past two weeks to just under M$4,000/t (3-to-6-
month futures: M$4,300/t). While a short-term correction may be due,
we expect prices to stay above M$3,000/t until 2010 due to the tight
supply of substitute soybeans, the continued fight for acreage with corn,
and the strong demand for food purposes from China and India. Our
CPO price assumptions of M$3,150/t for 2008 and M$3,000/t for 2009,
upon which our valuation and price target are based, provide ample
buffer for any short-term easing in CPO prices, in our view.

Encouraging trends from plantations in 1H FY08 results: In 1H
FY08, plantations showed strong FFB growth (+10% Y/Y) and yields
which management attributes partly to early signs of improved practices
from its integration (largely due to recovery from yield stress the year
before). Sime's CPO yields of 4.14% in FY07 provide ample room for
improvement in the long term versus IOI's and KLK's 5.0-5.7%.

Upgrade to OW: We maintain our Dec-08 PT of M$13.40 based on a
derived 7% discount to our SOTP value of M$14.40. Stripping out the
non-plantation business, the market at current levels is assuming a longterm
CPO assumption of US$788/t for Sime versus the long-term historic
CPI/inflation adjusted average of US$977/t. Key risks to our PT are cost
overruns and less favorable terms for the multi-billion Bakun project.

Kimeng: 28 feb Sime (hold)

> A stellar first half, driven by plantation, industrial & motor
> This is Sime Darby's first set of results post its merger with Kumpulan
> Guthrie and Golden Hope. The company (SDB, formerly known as Synergy
> Drive) reported H108 EPS of 24.5 sen (+2%) on a 22% rise in revenue.
> Excluding exceptional items, core EPS was 24 sen (+61%), buoyed by
> stronger profits at the plantation, industrial (formerly heavy
> equipment) and motor divisions. The exceptional income of RM485m in H107
> was derived mainly from the sale of Jaya Holdings shares and properties.
> Plantation was the star performer, with a 103% jump in EBIT, thanks to
> higher CPO prices (+67%). The industrial division posted an 18% rise in
> EBIT, helped by higher sales to the mining sector. Motor staged a sharp
> turnaround, thanks to a recovery in Malaysia. However, property saw
> lower profits due to delays in launches as a result of its rebranding
> exercise and the absence of land sales. An interim gross dividend of 5.0
> sen was declared.
>
> Above fair value; HOLD
> We recommend a HOLD on SDB as its SOTP valuation is around RM11.00,
> below its current share price.

HLG: 28 Feb Sime Darby - Big laggard to IOI, KLK

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.