Neutral on Sime Darby’s stake sale in Seriemas to PNB, move divests non-strategy assets
KUALA LUMPUR: Analysts collectively kept a neutral stance on Sime Darby Bhd’s (Sime Darby) move to sell its stake in Seriemas Development Sdn Bhd (Seriemas) to PNB Development Sdn Bhd (PNB).
In a filing on Bursa Malaysia, Sime Darby announced that wholly-owned subsidiary Sime Darby Property Bhd (Sime Darby Property) had on July 31, 2017, entered into a Share Sale Agreement with PNB for the disposal of its entire 40 per cent equity interest in Seriemas to PNB for a total cash consideration of RM625 million.
The research arm of Kenanga Investment Bank Bhd (Kenanga Research) was neutral on the sale as it gathered that the move is a part of Sime Darby’s long-term strategy to divest non-strategic assets.
In terms of valuation, Kenanga Research gathered that the deal values Seriemas at RM1.56 billion, which implied a historical price to book value (PBV) of 1.52-fold and historical price earnings ratio (PER) of 20-fold.
The research arm believed this was fair as it was in line with comparable developers’ current PBV of 1.47-fold and price earnings ratio (PER) of 20.3-fold.
“Sime Darby noted that the market value of the land was appraised at RM2.79 billion and thus the 40 per cent equity interest by Sime Darby Property was valued at RM1.23 billion,” the research arm said.
It added that after excluding a cash dividend of RM120 million received on June 2017 from Seriemas, this implied a revalued net asset valuation (RNAV) discount of 39.4 per cent.
This was in line with Kenanga Research’s property segment valuation of a 40 per cent RNAV discount, but priced at a premium to the property segment average discount of 52 per cent.
Given the one-off nature of the deal, the research arm expected minimal change to its core net profit (CNP) estimates.
The research arm believed the lower associate profit of circa RM20 to RM30 million per year would be partly offset by potentially lower interest charge of circa RM15 million, assuming the proceeds are used to pare down borrowings.
It calculated financial year 2018 estimate (FY18E) net gearing impact to be relatively negligible, with a small reduction to 0.27-fold (from 0.28-fold) as the proceeds represent only three per cent of FY18E borrowings.
Moving forward, with further earnings recognition from the Battersea Phase 1 project between the fourth quarter of 2017 (4Q17) to 1Q18, Kenanga Research expected to see robust contribution from Sime Darby Property in its upcoming result, due end-August.
“Meanwhile, the local property outlook is stablising, but unexciting in the mid-term, with muted expectations on the upcoming Budget 2018,” it said. As for other segments, the research arm expected the plantation division to report good year on year (y-o-y) and quarter on quarter (q-o-q) earnings growth on better crude palm oil (CPO) production and relatively high CPO prices.
On another note, the research arm pointed out that the motors outlook is slightly positive on new model releases, but the industrials outlook could remain lukewarm due to ongoing business reviews.