CIMB Research retains Add for Sime Darby, higher target price

MIDF Research said Sime Darby registered the highest net money inflow of RM25.37mil last week

KUALA LUMPUR: CIMB Equities Research keeps Sime Darby on its Add list with a higher sum-of-parts target price of RM9.80 due to its plans to unlock value and its better earnings prospects in view of higher crude palm oil (CPO) and coal prices in the future quarters.

Sime Darby plans to spin off its plantations and property businesses in separate listings on Bursa Malaysia, while the trading and logistic businesses will remain under Sime Darby Bhd, which will retain its listed status.

“We are not surprised by this news as the group had previously hinted that it was looking at various ways of unlocking shareholder value. 

“This initiative will allow each business to pursue their own distinct aspirations. We are positive on this development as the exercise could help the group unlock value via the better appreciation of its individual business units as pure plays, and the removal of the discount attached to its conglomerate structure,” it said on Friday.

CIMB Research said the exercise will lead to the spin-off of Sime Darby Plantation, which has a landbank of 988,599 ha and planted area of 603,254 ha, making it the largest oil palm plantation company in the world. 

“In our SOP valuation, we value the plantation division at RM39bil, based on FY18 P/E of 26 times and EV/ha of RM63,700. This will place it as the largest listed plantation company in Malaysia, with IOI and KLK coming in second and third with market caps of RM29bn and RM26bn, respectively,” it said.

“We are of the view that the attraction of Sime Darby’s property division lies in its access to strategic land banks in Malaysia. SD Prop is also Malaysia’s largest property developer in terms of land bank. 

“The group has 23 townships/developments and approximately 28,000 acres of land. This division will benefit from potential opportunities around Malaysia Vision Valley, Carey Island and High Speed Rail. We place a value of RM16bn for this division (based on P/BV of 1.6x) in our SOP,” it said.

“The industrial and motor businesses together with the logistics and healthcare divisions will remain in Sime Darby after the spin-off of the property and plantation units. Based on our SOP valuations, the rest of the business could be valued at RM11bn, post demerger of plantation and property.

“Following this news, we revise up our FY18 P/E valuations for the plantation business to 26 times from 24 times, and our P/BV valuations for the property business to 1.6 times from 1.5  times, leading to a higher SOP value of RM9.80. 

“We are raising our valuations for these divisions to reflect our view that investors will be willing to pay a premium for pure plays. Maintain Add as positive on plans to unlock value,” it said.