Monday, July 18, 2011

Sime Darby Company Insight: Sailing Smooth

18 July 2011
Price Target: RM10.99
Share Price: RM9.12


Highlights
# The recent basic wage increase for palm oil estate workers in Malaysia will raise its production cost by ~RM140m/year.

# FFB production growth would normalize to 5-8% from FY06/12 onwards, while CPO prices will stay at above RM3,000/tonne.

# Sime Darby still sees strong demand for mid-end residential properties. Given its positive outlook on the mid-end residential property segment, management revealed that it would shift its focus to develop new townships with affordable residential properties in the near term.

# Demand outlook at the heavy equipment division remains promising, with Australia and China remain as the major growth drivers.

# Management remains optimistic on sales at the luxury car segment in China (the segment that Sime Darby is in).

# We believe the Malaysian auto segment (especially marques that are under Sime Darby) will continue to do well in the near term, as:
(1) HP financing rate is still relatively low; and
(2) Booking for certain models (in particularly, Hyundai given its competitive pricing relative to its competitors) remains encouraging.

Catalysts
High CPO price to sustain, albeit lower in 2012;
- Recovery in FFB yield;
- Better-than-expected sales at \other divisions;
- Disposal of non-core and non-performing assets; and
- Higher-than-expected dividends.

Forecasts
FY06/11-13 net profit forecasts raised by 11.1-14.2%, largely to reflect:
- (1) Higher FFB output growth assumptions;
- (2) Higher sales volume and margin assumptions for both heavy equipment and motor divisions; and
- (3) Lower effective tax rate assumption that more than offset higher production cost at the plantations division.

Risks - Downside risks
- (1) Sharp plunge in CPO prices;
- (2) Worse-than-expected weather condition, resulting in lower-than-expected FFB
yield;
- (3) Escalating production cost; and
- (4) Labour shortage.

Rating - BUY
Positives
(1) High CPO prices; and
(2) Increasing earnings contributions from other divisions.

Negatives
Overseas expansion risks.

Valuation
SOP-derived Target Price raised by 5.3% to RM10.99.



Source: HLIB Research

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