This article first appeared in The Edge Financial Daily, on November 12, 2015.

Sime Darby Bhd
Nov 11 (RM8.13)
Maintain buy with a target price (TP) of RM9.10: Sime Darby Bhd is expected to release its first quarter of financial year 2016 (1QFY16) earnings on Nov 26. We expect its core net income (CNI) to be in the range of RM490 million to RM500 million. 

Overall, Sime Darby’s CNI is expected to meet the consensus estimate as 1QFY16 should make up 22% of consensus FY16 full-year forecast of RM2.27 billion.

Sime Darby registered strong fresh fruit bunch (FFB) volume of 2.82 million tonnes in 1QFY16, and its 12% FFB growth outperformed all other planters under our coverage which registered, on average, only 1% FFB growth. 

We believe that the majority of Sime Darby’s FFB growth was due to new contributions from New Britain Palm Oil Ltd (NBPOL). Recall that Sime Darby completed the acquisition of NBPOL in March. 

Overall, the high FFB growth should be supportive of the plantation division’s earnings despite a 7% crude palm oil price decline to RM2,058 per tonne.

Its industrial division’s earnings are likely to decline year-on-year (y-o-y) in line with low coal prices, which resulted in lower equipment deliveries and product support sales. 

The property segment may register a lower profit in line with lower unbilled sales at RM1.28 billion as of end-FY15 (versus RM2.3 billion at end-FY14). We expect a better outlook for the motor division with flattish earnings growth. Malaysian operations should improve in line with the better total industry volume seen, but overseas operations should remain challenging.

In the upcoming annual general meeting on Nov 23, we expect a final dividend of 19 sen to be approved with the payment date by the end of December.

Among the three big capitalised planters, Sime Darby’s FFB growth of 9% y-o-y for FY16 is the highest (against IOI Corp Bhd’s 2.5% and Kuala Lumpur Kepong Bhd’s [KLK] 4.7%). 

Valuation-wise, Sime Darby’s forward price-earnings ratio is the lowest at 20.2 times (against IOI Corp’s 23.3 times and KLK’s 23.5 times). Its dividend yield of 3.2% is also decent (against IOI Corp’s 3.6% and KLK’s 2.5%). Our TP is based on a sum-of-parts valuation. — MIDF Research, Nov 11