Results

• Weaker-than-expected… 1HFY06/15 core net profit of RM867m (-26%) missed expectations, accounted for only 29.6-32.7% consensus and our full-year forecasts.

• Against its headline KPI in FY06/15… The core net profit accounted for 34.7% of the full-year net profit target.

Deviation

• Weaker-than-expected performance at the plantation (in particularly, the midstream and downstream operations) and industrial divisions.

Dividends

• Declared interim single-tier DPS of 6 sen (entitlement date: 23 Apr 15; payment date: 8 May 15). For the fullyear, we are projecting a total DPS of 22 sen, translating to a net yield of 2.3%.

Highlights

• QoQ… 2QFY06/15 core net profit declined by 5.3% to RM421.8m, on the back of lower contributions from 3 of its 5 core divisions, namely plantation, property, and industrial divisions, which operating profit declined by 10.2%, 37.9% and 33.6% respectively.

• Highlights from briefing/conference call: (1) Expect better 2H, underpinned by better performance at the plantation and energy divisions; (2) Order book at industrial division improved to RM3.1bn (from RM2.4bn in end-Sep) but earnings will likely remain uninspiring for the next two years; and (3) Listing of motor division delayed to 2H 2015 on weak demand sentiment.

Risks

• Sharp fall in FFB output and/or palm product prices at the plantation division;
• Prolonged weak demand for mining equipment; and
• Delay in property launches.

Forecasts

• FY06/15-17 net profit forecasts cut by 4.4-7.6%, largely to account for: (1) Lower margin assumptions at the midstream-downstream operations; and (2) Lower margin assumption at the industrial division.

Rating

SELL

Negatives

• (1) Cooling economic activities in China andAustralia may have an adverse impact on Sime Darby’s earnings; and (2) Overseas expansion risk.

Positives

• Strong balance sheet.

Valuation

• SOP-derived TP on the stock lowered by 5.2% to RM8.14 to reflect the downward adjustment in our net profit forecasts. Recommendation downgraded from Hold to SELL as valuation becomes rich following the downgrade in our TP.

Source: Hong Leong Investment Bank Research - 27 Feb 2015