Sime Darby restructure could lead to de-rating

KUALA LUMPUR (Feb 2): Sime Darby Bhd’s restructuring plan to create three stand-alone businesses in the plantation, property as well as trading and logistics sectors could lead to a potential de-rating of the stock, say analysts.

Nomura Research said the de-rating could arise after the separate listings of its plantation and property divisions.

“These divisions are the key earnings drivers and account for around 80% of our sum-of-parts valuation for Sime Darby.

“In our view, a further collaboration of companies under the Permodalan Nasional Bhd (PNB) group is likely as PNB holds a 40.8% stake in Sime [Darby] and a 42% stake in UMW Holdings Bhd, which is involved in similar businesses as Sime’s [Darby] trading and logistics division.

“It is also possible that there is further collaboration and/or consolidation between Sime’s [Darby] property division and S P Setia Bhd given PNB’s 56.8% stake in S P Setia,” Nomura added in a Jan 27 note.

UOB Kay Hian said the current premium price-earnings (PE) ratio multiple that Sime Darby is trading at might be at risk of rerating to a lower PE multiple after the new plantation and property listings.

“Its other businesses will not fetch a rich valuation, more so with the near-term business outlook for automotive, industrial and ports remaining relatively weak.

“However, the final outcome and potential value creation still depends on the restructuring structure,” the firm said in a Jan 27 note.

UOB Kay Hian added that if crude palm oil prices remain high and recovery of production comes in stronger-than-expected, then a high value can be derived from the plantation listing.

To recap, Sime Darby announced on Jan 26 its plan to create pure plays to unlock value for the group.

The exercise could see the plantation and property pure plays listed on Bursa Malaysia as Sime Darby Plantation Bhd and Sime Darby Property Bhd respectively, while the group’s trading and logistics business will remain under Sime Darby which will retain its listed status.

JP Morgan Asia Pacific Equity Research, in its Jan 26 note, said that among the risks to the demerger strategy is a holding company discount to its asset value for Sime Darby.

“[A] holding company discount [could] potentially emerge but Sime [Darby] shareholders, we believe, may be compensated with shares in the plantation listed co and/or higher dividends post demerger as in the case of IOI’s [Corp Bhd] demerger of its property unit in 2014,” said JP Morgan.

It noted another factor that could pose a risk is Sime Darby’s low return on equity (ROE) of 5%.

“Sime’s [Darby has a] low ROE at 5%, [based on financial year ending June 30, 2017 (FY17) estimates] versus 10% to 14% for IOI and Kuala Lumpur Kepong Bhd.

“[However] we believe earnings for Sime [Darby] have bottomed, after two consecutive years of sharp core earnings decline of over 30% compound annual growth rate over FY15 to FY16.

“Quarterly results, hence, will be key to watch where a recovery in plantation earnings will strengthen the case for value unlocking on asset valuations,“ it added.

In its Jan 27 note on Sime Darby, Kenanga Research said the group could raise some RM27.2 billion from the pure play exercise.

“Based on our speculated scenario, where Sime [Darby] maintains a 51% stake in each entity, we estimate some RM27.2 billion [could be raised] from this exercise, with plantation fetching RM19.4 billion and property raising RM 7.8 billion.

“This represents cash per share of RM4.10 … Assuming Sime [Darby] retains 50% of funds raised and pays out the rest as dividends, this could represent a bumper dividend of RM2 per share or 22% of current share price,” Kenanga said.

The firm opined that Sime Darby’s move to unlock shareholder value is an exciting rerating catalyst considering the potential for a substantial cash payout while maintaining business as usual in the respective segments.

Sime Darby’s share price closed 32 sen (3.5%) lower to RM8.91 on Tuesday, giving it a market value of RM60.6 billion.

This article first appeared in The Edge Financial Daily, on Feb 2, 2017. Subscribe to The Edge Financial Daily here.