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Sime Darby Berhad : Short-Term Weakness In FFB Production,But Long-Term Sustainability Intact - 29/4/2010

Sime Darby Berhad : Short-Term Weakness In FFB Production,But Long-Term Sustainability Intact - 29/4/2010

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Published by Rhb Invest
Six key takeaways from our recent visit:
(1) Slower FFB production in Indonesia now;
(2) Longer-term FFB growth sustainable;
(3) CPO price view unchanged;
(4) Production costs to decline, but not as significantly as seen in 1HFY10;
(5) Property division picking up speed; and
(6) Capex higher than expected.
Six key takeaways from our recent visit:
(1) Slower FFB production in Indonesia now;
(2) Longer-term FFB growth sustainable;
(3) CPO price view unchanged;
(4) Production costs to decline, but not as significantly as seen in 1HFY10;
(5) Property division picking up speed; and
(6) Capex higher than expected.

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Published by: Rhb Invest on Apr 29, 2010
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07/10/2013

 
 
Page 1 of 5
A comprehensive range of market research reports by award-winning economists and analysts are exclusivelyavailable for download from
w w w .rhbinvest.com 
 
Table 1 : Investment Statistics (SIME; Code: 4197) Bloomberg: SIME MKNet Core EPS Cons. NetFYE Turnover profit EPS gth PER EPS* P/NTA P/CF* ROE Gearing GDYJun (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)2009
31,013.9 2,255.2 37.5 (38.1) 23.3 - 2.6 17.1 10.6 10.7 2.5
2010f 
31,855.9 2,377.5 39.6 5.4 22.1 45.0 2.6 15.6 10.9 17.2 2.5
2011f 
35,294.9 2,904.6 48.3 22.2 18.1 54.0 2.5 13.1 12.6 20.1 3.3
2012f 
39,784.0 3,056.2 50.9 5.2 17.2 59.0 2.4 12.4 12.7 24.1 3.9
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates
 
Six key takeaways from our recent visit:
(1) Slower FFBproduction in Indonesia now; (2) Longer-term FFB growth sustainable;(3) CPO price view unchanged; (4) Production costs to decline, but notas significantly as seen in 1HFY10; (5) Property division picking upspeed; and (6) Capex higher than expected.
 
 
Slower FFB production in Indonesia now.
Management is nowguiding for a decline in FFB production of between 5-7% yoy forFY06/10 (versus the guidance of +5-8% yoy growth just two monthsago), caused by the weather conditions as well as tree stress seenrecently at its Indonesian estates. Although this is lower than ourprojected FFB growth forecast of 6.1% yoy for FY10, we continue tobelieve there will be some growth in FFB production in FY10, albeit at asmaller amount, given the recovery in production seen in Mar 2010, of 21.2% mom. We are revising our FFB production forecasts down toproject a 1.8% yoy growth for FY10 (from 6.1% previously). For FY11-12, we are now projecting FFB production growth of between 4.1-5.5%p.a. (from 4.2-4.4% previously), on the back of yield improvements inIndonesia, assuming normal weather conditions.
 
In the longer term.however, future growth should come from an increase in mature areas(as 10% of its planted landbank is immature) and an improvement inage profile (as 20% of its landbank is between 4-8 years in age).
 
Forecasts revised down by 2.8-6.4% p.a. for FY10-12
, after: (1)reducing our FFB yield and production estimates for FY10-12; (2)adjusting our new planting assumptions for FY10-12 based onmanagement guidance; (3) raising our sales projections for theproperty development division for FY10-12; and (4) raising our capexassumptions for FY10-12.
 
 
Risks
: (1) a reversal in crude oil price trend resulting in reversal of CPO and other vegetable oils price trend; (2) weather abnormalities;(3) change in emphasis on implementing global biofuel mandates; and(4) a slower-than-expected global economic recovery.
 
 
Investment case.
Post-earnings revision and adjustment of some of the target PE valuations for Sime’s other divisions, we reduce our SOP-based fair value for Sime to RM9.70 (from RM9.85). We have raisedour target PEs for the motor sector to 14x CY10 (from 12x previously),the energy & utilities sector to 16x CY10 (from 15x), the heavyequipment sector to 14x CY10 (from 13.5x) and the property sector to14x CY10 (from 13.5x), to be in line with the recent upgrades in thesesectors’ target valuations. Maintain
Outperform
recommendation forSime given its further potential upside from GLC reforms, additionalmerger synergies and yield improvements from its Indonesianplantations.
 
Corporate Highlights 
Visit Note
Sime Darby
Short-Term Weakness In FFB Production, But Long-Term Sustainability Intact
Share Price : RM8.76Fair Value : RM9.70Recom :
Outperform
(Maintained)
Issued Capital (m shares) 6,009.4Market Cap(RMm) 52,642.3Daily Trading Vol (m shs)11.752wk Price Range (RM)6.25-9.24Major Shareholders: (%)Skim Amanah SahamBumiutra30.9Permodalan Nasional Bhd 17.0Employees Provident Fund 11.7
FYE June FY10 FY11 FY12
EPS chg (%) (2.8) (6.4) (5.4)Var to Cons (%) (12.1) (10.5) (13.8)
PE Band ChartRelative Performance To FBM KLCI
Hoe Lee Leng(603) 92802184hoe.lee.leng@rhb.com.my
29 April 2010
RHB ResearchInstitute Sdn Bhd
A member of theRHB Banking Group
Company No: 233327 -M
   M  a   l  a  s  i  a
   M   A   R   K   E   T   D   A   T   E   L   I   N   E
 
   P   P    7   7   6   7   /   0   9   /   2   0   1   0   (   0   2   5   3   5   4   )
Please read important disclosures at the end of this report.
 
Sime Darby
 
FBM KLCI
 
PER = 16x
 
PER = 14x
 
PER = 12x
 
 
29 April 2010
 
Page 2 of 5
A comprehensive range of market research reports by award-winning economists and analysts are exclusivelyavailable for download from
w w w .rhbinvest.com 
 
Visit Notes
 
Six key takeaways
from our recent visit: (1) Slower FFB production in Indonesia now; (2) longer-termFFB growth sustainable; (3) CPO price view unchanged; (4) Production costs to decline, but not assignificantly as seen in 1HFY10; (5) Property division picking up speed; and (6) Capex higher thanexpected.
 
Slower FFB production in Indonesia now.
In 9MFY06/10, Sime recorded FFB production growth of 3%yoy, on the back of improvement in FFB yields, particularly after the weak production caused by the wetweather in the previous year. However, we note that the rate of improvement is on a declining trend,especially in view of the fact that in 3QFY10, Sime’s FFB production fell 4.7% yoy and 27.9% qoq. This wasmainly attributed to a decline in yields in Indonesia, particularly in Feb 2010. We understand that in Feb,Indonesia’s production was down about 5% yoy (versus +10% yoy in Jan), while production in Malaysia fellapproximately 13% yoy (versus -10% yoy in Jan). Going forward, management is now guiding for adecline in FFB production of between 5-7% yoy for FY06/10 (versus the guidance of +5-8% yoy growth just two months ago), caused by the weather conditions as well as tree stress. Although this is significantlylower than our projected FFB growth forecast of 6.1% yoy for FY10, we continue to believe there will besome growth in FFB production in FY10, albeit at a smaller amount than our original assumptions, given therecovery in production seen in Mar 2010, of 21.2% mom. We are therefore revising our FFB productionforecasts downward to project a 1.8% yoy growth for FY10 (from 6.1% previously). For FY11-12, we arenow projecting FFB production growth of between 4.1-5.5% p.a. (from 4.2-4.4% previously), on the backof yield improvements in Indonesia, assuming normal weather conditions.
 
Longer-term FFB growth sustainable.
In the longer term, Sime expects future growth to come from anincrease in mature areas (as 10% of its planted landbank is immature) and an improvement in age profile(as close to 20% of its planted landbank is between 4-8 years in age). In Malaysia, Sime has unplantedlandbank of approximately 33,520ha, while in Indonesia, Sime has got unplanted landbank of about67,255ha (as at end-FY06/09). However, out of this unplanted landbank, only about 20,000ha is plantable(all in Indonesia), which Sime intends to fully plant up by end CY2010. Subsequently, Sime will concentrateon planting up its 220,000ha landbank in Liberia. Sime has already set up a nursery in the first phase of itsestate in Liberia, and has a long-term target of planting up 100,000ha in Liberia by 2015. By end-CY2010,Sime intends to plant up 10,000ha of land, and continue planting up 20,000-25,000ha per yearsubsequently. Development cost of the initial 10,000ha is estimated at RM60-70m, which includes the costof a CPO mill, and is to be spent over FY10-11. Excluding the mill cost, we estimate development cost to beapproximately RM20-30k/ha, which may seem on the high end versus Malaysian and Indonesian plantationdevelopment cost of RM12-15k/ha. However, we note that this cost would also include basic infrastructurecosts like roads, housing etc, which would be non-existent in Liberia, as well as ensuring the estatestandards are in line with RSPO guidelines. We note that the capex for this land development has alreadybeen included in our capex assumptions for FY10-11.
 
CPO price view unchanged.
Sime has not changed its CPO price view or its forward selling policy, andcontinues to sell up to 20% of its production three months forward. Given the currently higher price levels,we maintain our CPO price assumption of RM2,450/tonne for FY10.
 
Production costs to decline, but not as significantly as seen in 1HFY10.
Sime’s CPO production costin 1HFY06/09 was around RM1,000/tonne (excluding kernel credit), which was a 10% decline yoy.However, we believe this decline may not be sustainable in 2HFY10, due to the lower productivity seen inIndonesia recently, and the potentially higher labour costs. As such, we maintain our more conservativeprojection of a 5-6% p.a. decline in production costs in FY10.
 
Property division picking up speed.
The property division has picked up speed in the last quarter of FY06/10, in terms of property launches as well as sales of unsold stocks. We understand that up to Feb2010, property sales have already touched close to RM1bn, which is 80% of our FY10 sales projections.We, therefore, revise up our topline growth assumption for FY10 to reflect a 9.6% yoy growth (from 3.2%previously) for the property development division. Going forward, we believe there will be a strongerrecovery from FY11 onwards, as Sime’s property launches have resumed while property sales (especially inthe Klang Valley) have been very active of late. According to some media reports, Sime intends to launchone new property project a month for the next six months, which would include launches for its KLGCCtownhouses (GDV approximately RM200m for 120 units), residential units in Denai Alam, USJ Heights andBukit Jelutong. The latest phase of its Ara Damansara development, Seri Pilmoor, which has a GDV of RM469m, which was launched in Mar 2010, was sold out within 1.5 days. Sime targets to achieve property
 
29 April 2010
 
Page 3 of 5
A comprehensive range of market research reports by award-winning economists and analysts are exclusivelyavailable for download from
w w w .rhbinvest.com 
 
sales of RM1.5-2bn p.a. every year for the next six years, on the back of its remaining undevelopedproperty projects, which is in line with our forecasts.
 
Capex higher than expected.
Sime projects capex for FY10 to be around RM3.4bn, which is higher thanour projected RM3bn. The increase, we believe, comes mainly from additional expenditure required for itsChina refinery expansion, which we had not included in our forecasts previously, as well as increasedexpenditure for the energy & utilities division’s expansion in China. Out of the total capex, approximatelyRM1.8bn would be used in the plantations division (for refineries in Malaysia, Indonesia and China as wellas new planting cost), RM0.7bn for the energy & utilities division, RM0.45bn for the industrial division andRM0.45bn for the other divisions. We have, therefore, raised our capex assumptions for FY10-12 to RM3-3.4bn (from RM2.5-3bn previously).
Risks
 
Risks to our recommendation
include: (1) a convincing reversal in crude oil price trend resulting inreversal of CPO and other vegetable oils price trend; (2) weather abnormalities resulting in an over orunder supply of vegetable oils; 4) increased emphasis on implementing global biofuel mandates and trans-fat policies; and 5) a slower-than-expected global economic recovery, resulting in lower-than-expecteddemand for vegetable oils.
Forecasts
 
Forecasts revised down by 2.8-6.4% p.a..
All in, we reduce our core net profit forecasts for Sime by2.8-6.4% for FY10-12, after: (1) reducing our FFB yield and production estimates for FY10-12; (2)adjusting our new planting assumptions for FY10-12 based on management guidance; (3) raising our salesprojections for the property development division for FY10-12; and (4) raising our capex assumptions forFY10-12.
Valuation and Recommendation
 
 
Maintain Outperform.
Post-earnings revision and adjustment of some of the target PE valuations forSime’s other divisions, we reduce our SOP-based fair value for Sime to RM9.70 (from RM9.85) (see Table2). We have raised our target PEs for the motor sector to 14x CY10 (from 12x previously), the energy & utilities sector to 16x CY10 (from 15x), the heavy equipment sector to 14x CY10 (from 13.5x) and theproperty sector to 14x CY10 (from 13.5x), to be in line with the recent upgrades in these sectors’ targetvaluations. Maintain
Outperform
recommendation for Sime, given the further potential upside from GLCreforms, additional merger synergies and yield improvements from its Indonesian plantations.
Table 2. Sum-Of-Parts BreakdownDivision Valuation method Value (RMm)
Plantations CY10 PE 18x 43,216.9Property CY10 PE 14x 5,310.3Motor CY10 PE 14x 3,168.5Heavy Equipment CY10 PE 14x 11,210.8Energy & Utilities CY10 PE 16x 3,841.6Others CY10 PE 14x 272.0Net Cash / (Debt) End 2QFY10 (2,098.0)
TOTAL 64,922.1
No. issued shares 6,009.4
SOP/share (RM) 10.80
Less: Holding co discount 10% (1.08)
Fair Value/share (RM) 9.72
Source: RHBRI

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