MARKET DEVELOPMENT
Higher Contributions Expected From Sime Darby’s Plantations Segment
Higher Contributions Expected From Sime Darby’s Plantations Segment
26/10/2016 (Borneo Post) - Despite projecting a slow recovery for Sime Darby Bhd (Sime Darby), AllianceDBS Research Sdn Bhd (AllianceDBS Research) notes that there is higher expected contribution from the group’s plantations segment on a weaker expected ringgit.
According to AllianceDBS Research, movements in crude palm oil (CPO) prices would directly impact the group’s profitability.
The research house noted that while Sime Darby’s sheer size of planted oil palm estates totalling 604,000 hectares (ha) should mitigate regional differences in fresh fruit bunch (FFB) yields, the group’s relatively higher average age of oil palm trees of about 17.4 years also limits growth potential relative to younger peers.
“Sime Darby’s plantation segment is therefore relatively more prone to CPO price/currency volatilities and weather vagaries,” it said.
“The group’s large planted area also means that operational efficiency may lag behind smaller-sized peers.”
It further noted that following the New Britain Palm Oil (NBPOL) acquisition, Sime Darby’s average age is expected to come down to 15.6 years by end of financial year 2017 (FY17).
“This would be further improved through aggressive replanting,” AllianceDBS Research said.
Given the group’s large size and relatively older trees, the research house added that Sime Darby’s FFB output is forecast to expand by 1.2 per cent compound annual growth rate (CAGR) between FY16 and FY19F.
On to Sime Darby’s property segment, excluding gains, AllianceDBS Research expected the group’s property segment to contribute circa 19 per cent of the its operating profit in FY17F.
“The segment has seen steady growth over the past few years and this has helped to offset volatility in plantation and industrial segments’ contributions,” the research house said.
While seeing headwinds from tighter lending in Malaysia this year, AllianceDBS Research believed that property still offers marginal growth from the development of investment properties, while benefiting from Sime Darby’s sizeable land bank for further launches.
The research house believed disclosure of Sime Darby’s gross development value per project and ongoing asset monetisation would help to unlock value in this segment.
As for the group’s industrial segment, AllianceDBS Research noted that it is engaged in sales and rental of heavy equipment (mainly Caterpillar and Bucyrus brands), as well as after-sales servicing and maintenance.
“Profit for this segment is driven by capex-spend principally undertaken by coal/iron ore miners, in addition to construction companies,” the research house said.
“Volatility in the underlying commodity prices and bank lending, as well as construction activities would influence the demand for Sime Darby’s heavy equipment products.”
It added that while underlying commodity prices have recovered, this is mainly driven by output scale-back from some of the smaller miners – which may not yet necessarily translate into positive impact on Sime Darby’s industrial segment.
Meanwhile, AllianceDBS Research highlighted that Sime Darby’s motor segment depends on banks’ lending policies, government regulations on taxes and consumer purchasing power.
With roughly half of Siime Darby’s profit contribution coming from Malaysia and the other half from China/Hong Kong, the group will continue to face challenges in FY17F, in the research house’s view.
“Tighter lending has pushed back appetite for new cars in Malaysia, while the crackdown on corruption and intense competition in China has also dampened its sales contribution in China/Hong Kong over the past few years.
“We believe an eventual listing of this segment could offer some cashflow reprieve for the group,” it said.
Overall, AllianceDBS Research adjusted FY17F and FY18F earnings by up two per cent and up seven per cent, respectively, mainly to reflect better contributions from plantations, as the research house upgraded benchmark CPO price (in ringgit terms) by two per cent and eight per cent, respectively.
The research house kept its assumptions for motor, industrial; and property segments unchanged.
AllianceDBS Research thus upgraded its call to ‘hold’ in view of higher expected contribution from the plantations segment on a weaker expected ringgit.
“Yet, lingering El Nino impact (including volume growth from NBPOL) and lacklustre demand for new equipment/cars/property imply a slow earnings recovery from FY17F,” it said.
Despite its upgraded FFB yield expansion, AllianceDBS Research continued to expect unexciting three per cent earnings CAGR over FY16-19F.
The research house believed higher earnings expectations (partly from a weaker ringgit) are priced in.
Imputing its earnings revisions, AllianceDBS Research raised Sime Darby’s sum of parts (SOP)-based target price to RM7.40 per share (fully diluted) from RM6.30 per share previously.
“This implies seven per cent downside from the current level; excluding circa three per cent FY17F dividend yield,” the research house said.
“Sime Darby’s diversified model is not an attractive proposition for now; as most of its operating segments are facing headwinds.”
According to AllianceDBS Research, movements in crude palm oil (CPO) prices would directly impact the group’s profitability.
The research house noted that while Sime Darby’s sheer size of planted oil palm estates totalling 604,000 hectares (ha) should mitigate regional differences in fresh fruit bunch (FFB) yields, the group’s relatively higher average age of oil palm trees of about 17.4 years also limits growth potential relative to younger peers.
“Sime Darby’s plantation segment is therefore relatively more prone to CPO price/currency volatilities and weather vagaries,” it said.
“The group’s large planted area also means that operational efficiency may lag behind smaller-sized peers.”
It further noted that following the New Britain Palm Oil (NBPOL) acquisition, Sime Darby’s average age is expected to come down to 15.6 years by end of financial year 2017 (FY17).
“This would be further improved through aggressive replanting,” AllianceDBS Research said.
Given the group’s large size and relatively older trees, the research house added that Sime Darby’s FFB output is forecast to expand by 1.2 per cent compound annual growth rate (CAGR) between FY16 and FY19F.
On to Sime Darby’s property segment, excluding gains, AllianceDBS Research expected the group’s property segment to contribute circa 19 per cent of the its operating profit in FY17F.
“The segment has seen steady growth over the past few years and this has helped to offset volatility in plantation and industrial segments’ contributions,” the research house said.
While seeing headwinds from tighter lending in Malaysia this year, AllianceDBS Research believed that property still offers marginal growth from the development of investment properties, while benefiting from Sime Darby’s sizeable land bank for further launches.
The research house believed disclosure of Sime Darby’s gross development value per project and ongoing asset monetisation would help to unlock value in this segment.
As for the group’s industrial segment, AllianceDBS Research noted that it is engaged in sales and rental of heavy equipment (mainly Caterpillar and Bucyrus brands), as well as after-sales servicing and maintenance.
“Profit for this segment is driven by capex-spend principally undertaken by coal/iron ore miners, in addition to construction companies,” the research house said.
“Volatility in the underlying commodity prices and bank lending, as well as construction activities would influence the demand for Sime Darby’s heavy equipment products.”
It added that while underlying commodity prices have recovered, this is mainly driven by output scale-back from some of the smaller miners – which may not yet necessarily translate into positive impact on Sime Darby’s industrial segment.
Meanwhile, AllianceDBS Research highlighted that Sime Darby’s motor segment depends on banks’ lending policies, government regulations on taxes and consumer purchasing power.
With roughly half of Siime Darby’s profit contribution coming from Malaysia and the other half from China/Hong Kong, the group will continue to face challenges in FY17F, in the research house’s view.
“Tighter lending has pushed back appetite for new cars in Malaysia, while the crackdown on corruption and intense competition in China has also dampened its sales contribution in China/Hong Kong over the past few years.
“We believe an eventual listing of this segment could offer some cashflow reprieve for the group,” it said.
Overall, AllianceDBS Research adjusted FY17F and FY18F earnings by up two per cent and up seven per cent, respectively, mainly to reflect better contributions from plantations, as the research house upgraded benchmark CPO price (in ringgit terms) by two per cent and eight per cent, respectively.
The research house kept its assumptions for motor, industrial; and property segments unchanged.
AllianceDBS Research thus upgraded its call to ‘hold’ in view of higher expected contribution from the plantations segment on a weaker expected ringgit.
“Yet, lingering El Nino impact (including volume growth from NBPOL) and lacklustre demand for new equipment/cars/property imply a slow earnings recovery from FY17F,” it said.
Despite its upgraded FFB yield expansion, AllianceDBS Research continued to expect unexciting three per cent earnings CAGR over FY16-19F.
The research house believed higher earnings expectations (partly from a weaker ringgit) are priced in.
Imputing its earnings revisions, AllianceDBS Research raised Sime Darby’s sum of parts (SOP)-based target price to RM7.40 per share (fully diluted) from RM6.30 per share previously.
“This implies seven per cent downside from the current level; excluding circa three per cent FY17F dividend yield,” the research house said.
“Sime Darby’s diversified model is not an attractive proposition for now; as most of its operating segments are facing headwinds.”