SIME DARBY BHD

Target Price: RM8.05

ACCORDING to UOBKH, Sime’s management is confident of meeting its net profit target of RM2.2bil for FY17, which includes gains from an asset disposal.

“Meanwhile, we are expecting stable results in the fourth quarter - supported by an increase in fresh fruit bunches (FFB) production and steady crude palm oil prices. The proposed listings of the plantation and property divisions are on track,” it said.

The research house noted that FFB production is likely to be flat or marginally higher year-on-year (y-o-y) for FY17.

For the eleven months of FY17, FFB production was at nine million tonnes (+0.9% y-o-y).

While it said FFB production in June 2017 is expected to be flat month-on-month (m-o-m) due to the fewer harvesting days as the Raya festive season fell on 25-26 June 2017.

“As such, FFB production is likely to be flat or marginally higher y-o-y. This is in-line with our and management’s FFB production growth expectations of 0-4% y-o-y for FY17.

“Meanwhile, FFB production has improved y-o-y since Oct 16 as the lagged impact from the severe drought is weakening,” it said.

UOBKH has noted that Sime’s management indicated that the FFB production is likely to normalise in the fourth quarter.

“Thus, we are forecasting stronger FFB production recovery of 10% y-o-y for FY18,” it said.

UOBKH noted that in the nine months of FY17, Sime reported a net profit of RM1.79bil (+40.5% y-o-y) and by excluding one-off gains, core net profit was RM1.29mil (+96.6% y-o-y).

“Management is confident of achieving its net profit target of RM2.2bil for FY17 on the back of disposal gains of an asset in Kuala Langat, Selangor, better FFB production and stable CPO prices, better performance from the industrial division, profit recognition from Battersea project phase 1, and the revaluation of investment properties,” it said.

UOBKH has maintained its sell rating and target price of RM8.05, based on a price to earnings (PE) ratio of 22 times (+1 standard deviation to five-year mean PE) on a fully-diluted FY18 forecast earnings per share.

The research house said its sell call is mainly due to the FY18 earnings forecast adjustment as it has trimmed its average CPO price assumption to RM2,400 per tonne from RM2,500 per tonne in view of the rising risk of significant CPO price weakness going into 2018 as palm oil is likely to see oversupply by mid-18.

“However, we believe that Sime’s share price is likely to hold well in the near term, supported by the potential listings of its plantation and property division which are expected to unlock group value,” it said.