29/11/2011 (The Star) - Given the ongoing uncertainties in the global economy, Sime Darby Bhd's guidance for a more “conservative” set of earnings performance is not a surprising move and may well prove to be a wise decision later when it closes its book for the current fiscal year.

“By not trying to be over-promising on what it could deliver at the end of its financial year, Sime is doing it right in terms of managing investors' expectations,” an analyst told StarBiz.

“It will be good for the company if it could perform better than it said it could ... and stakeholders will be happy,” he explained, adding that he believed the conglomerate could easily achieve the key targets it had set for itself.

Bakke has set a target net profit of RM3.3bil for financial year 2012.

Last week, Sime president and group chief executive Datuk Mohd Bakke Salleh announced that the company had set its headline key performance indicators (KPI) at RM3.3bil for net profit and 13.3% for a return on average shareholders' funds (ROASF) for its financial year (FY) ending June 30, 2012.

This compared with its actual net profit of RM3.67bil and ROASF of 16.5% in FY2011, and Bloomberg's consensus estimates of a net profit of RM3.8bil and a return on equity of 15.3% for Sime for FY2012.

CIMB Research analyst Ivy Ng had earlier highlighted to StarBiz that Sime had a strong track record of surpassing its own KPIs. The only time the company failed to achieve its targets was in FY2010, during which its oil and gas division surprisingly registered a huge loss.

Sime is already in the process of disposing of its loss-making oil and gas business. It is expected to complete the exercise by early next year.

According to Bakke, Sime's relatively more “conservative” targets for FY2012 were based on an average crude palm oil (CPO) price of slightly below RM2,800 per tonne.

In general, industry analysts did expect CPO prices to trend down next year, given the ample supply of the commodity in the international market and lacklustre demand growth on the back of an uncertain economic outlook.

Most plantation analysts said the average CPO price could likely fall to RM2,700 per tonne next year before recovering the following year.

Still, there could be some limited upside to CPO prices next year if the weather turned unfavourable and affect production, and if demand from China picked up further.

Bakke said it would be a bonus or upside for Sime if CPO prices could be above RM3,000 per tonne.

Sime's plantation division has always been its main earnings contributor.

During its first quarter of FY2012, Sime's plantation division registered an operating profit increase of 90% year-on-year (y-o-y) to RM933mil and contributed 62% to the group's earnings.

The strong showing in this division was due to higher CPO prices, which averaged at RM2,946 per tonne during the quarter in review compared with RM2,511 previously, as well as improvements in fresh fruit bunches production (up 8% y-o-y) and oil extraction rate of 21.9% compared with 21.2% previously.

Sime's net profit for the first quarter of FY2012 stood at RM1.07mil on revenue of RM11.06bil. The numbers represented an increase of 64% y-o-y for net profit and 28% y-o-y for revenue.

Earnings per share stood at 17.9 sen, compared with 10.9 sen previously.

Sime's results for the first quarter had already accounted for almost one-third of its headline KPI.

Analysts said the first-quarter performance was a good set of results, but maintained that the numbers were broadly in line with market expectations.

“There's nothing really surprising that it warrants any significant re-rating,” an analyst told StarBiz.

According to Bloomberg's poll of 27 analysts, 16 had a “buy” call on the counter, while nine recommended “hold”, and two “sell”. The average target price for Sime was tagged at RM9.51 per share.

Macquiries Equity Research, in its note, said of the Sime's plantation business: “We expect the growth momentum to slow in coming quarters, as Malaysia and Indonesia enter a period of biological yield slowdown in 2012.”

The research house said it believed that Sime's property segment would continue to be the area of weakness and the question remained as to how and when the company's recent acquisition of a stake in Eastern & Oriental Bhd could translate into synergies for that business.

During the quarter in review, Sime's propery division registered an operating profit increase of only 3% y-o-y to RM60.5mil and contributed to 4% to group's earnings.

The international research house said it expected Sime Darby's industrial division to also experience slower growth momentum in the days ahead, as demand, particularly from China, could slow.

During the quarter in review, Sime Darby's industrial division was a star performer, along side the plantation sector. The industrial division registered an increase of 42% y-o-y in operating profit to RM330mil and contributed 22% to the group's earnings.

Last Friday, the counter closed unchanged at RM8.88 after it unveiled its results.