This article first appeared in The Edge Financial Daily, on April 1, 2016.

Sime Darby Bhd
(March 31, RM7.95)
Maintain hold with an unchanged target price of RM7.43: The recent sukuk wakalah issue sets in motion plans to degear the group. We met with management and learned that the monetisation of properties in Malaysia and Singapore is in the works. 

Based on balance sheet data as at end-2015, we estimate that Sime Darby Bhd’s gross gearing ratio declined from 0.61 times to 0.51 times after the sukuk wakalah issue and further to 0.47 times when it completes the monetisation of its properties in Australia and Singapore by the end of June 2016.     

Sime remains keen to expand its core businesses, including through acquisition of sizeable plantation land.   

A stronger balance sheet should allow the group to further expand its core businesses.

Meanwhile, crude palm oil prices are significantly firmer now and production is still on track to meet our forecast of 10.11 million tonnes. 

The downturn in the heavy equipment business seems to have stabilised and the industrial division is expected to do better in the second half of financial year 2016 (2HFY16) and FY17.   

New property sales declined to around RM300 million in 1HFY16, but the group is still aiming for a total gross sales value of RM2 billion for FY16. 

Lumpy contributions from Phase 1 of the Battersea project are still expected in Sime’s FY17.

Sales of BMW continue to be affected by the lack of a broad range of all-new models and issues in key markets.  

Potential higher effective costs from the sukuk wakalah issue should not significantly impact FY16 to FY18 earnings, which are unchanged. — Affin Hwang Capital, March 31