Sime Darby Bhd
(Nov 29, RM8.80)
Upgrade to buy with revised target price RM10.20 (from RM9): Sime Darby reported 1QFY11 earnings of RM654.7 million (-4% year-on-year; reversing from 4QFY10 loss) — in line with our forecast on an annualised basis. Top line grew 14% to RM8.78 billion, driven by the motor, property, industrial, and utilities segments, thanks to robust demand for the group’s products.
However, earnings before intrest and tax (Ebit) was affected by weaker plantations performance (due to lower volumes) and losses in engineering (due to a lack of new projects). We understand that Sime is currently bidding for three new fabrication projects. No dividends were declared for 1QFY11.
The group’s oil palm harvesting in Indonesia suffered a one-off setback in 1QFY11 due to flooding in South Kalimantan, which has since receded.
Fresh fruit bunch (FFB) harvesting in Indonesia is on track to recover in subsequent quarters. However, Malaysian FFB yield will fall behind our initial expectations as the lagged impact brought on by the drought in early CY10 is worse than expected.
We reduce FY11F/13F plantations Ebit by 8% to 15% on cuts in overall yields. However, the motor segment Ebit contribution is raised by 65% to 67%, industrial (8% to 9%) and property (7%). Hence, CY11F/13F earnings are raised by 2% to 6% and target price lifted by 13% to RM10.20 (based on sum-of-parts).
Recovery in most of the group’s businesses has exceeded our expectations.
We believe Sime deserves a second look as the current earnings growth momentum still has legs and the shares offer a 17% potential upside to our RM10.20 target price. — HwangDBS-Vickers Research, Nov 29
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