Thursday, August 25, 2011

Sime Darby Earnings Valuation: FY06/11 Results: Above Our Expectation

26 August 2011
Price Target: RM10.59
Share Price: RM8.80

FY06/11 core net profit of RM3,808.5m beat our expectation, accounted for 110.5% of our full-year forecast. Against consensus, the results came in within expectations, at 102.6% of the estimates.

Higher-than-expected contribution from the plantation, industrial, and motor divisions.

# FY06/12 core net profit rose by 28.5% to RM3.8bn from RM3.0bn a year ago mainly due to:
(1) Higher plantation earnings contribution (which in turn was driven by higher output and prices);
(2) Better performance at the industrial division thanks to strong sales in Australia, China and Malaysia; and
(3) Strong demand for motor vehicles across all regions.

# 4QFY12 core net profit rose by 58% qoq to RM1,382.6m mainly due to improved profit contribution from all divisions (with the exception of the health care division).

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

FY06/12-13 net profit forecasts raised by 0.1-3.1%, largely to reflect higher margin assumptions at both the industrial ad motor divisions, and slightly higher FFB output growth assumption in Malaysia.

Rating - BUY
- 1) Sustained high CPO prices; and
- 2) Entrance of new management and post kitchen sinking suggests the worst is over.

- Overseas expansion risks.

SOP-derived TP cut by 3.7% from RM10.99 to RM10.60 to reflect higher holding company discount (10% vs. 5% previously arising from higher risk premium at times of uncertain economic condition) that more than offset an upward revision in our forecasts.

Source: HLIB Research

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