Sime’s big split
What lies ahead for the group?
SIME Darby Bhd’s EGM to approve the demerger process on Nov 20 will be a bittersweet day for shareholders. The meeting will essentially be the last time the century-old conglomerate will exist as a holding company having direct stakes in businesses that run oil palm plantations to operating hospitals.
On the other hand, should shareholders approve the demerger, that will see Sime Darby being split into three companies. That is guaranteed to happen since majority shareholder Permodalan Nasional Bhd (PNB), which is driving the process, is allowed to vote.
The companies, which will be component stocks in the FBM KLCI until the next scheduled meeting, will be Sime Darby Plantation Bhd, Sime Darby Property Bhd and Sime Darby Bhd.
Sime Darby Plantation will host all the plantation businesses within the group, and Sime Darby Property will likely take charge of the property businesses. The rest of the business, predominantly the heavy equipment, motor and other businesses like the ports that the group operates will be parked under Sime Darby.
The demerger is designed to create investee companies that will go back to their core business, as what PNB group chairman Tan Sri Wahid Omar describes as the purpose of the restructuring plan.
Fortress Capital Group CEO Thomas Yong says the demerger is in line with PNB’s 2017-2022 strategic plan, where it is looking to maximise its core company performance through value-creation initiatives.
“A demerger exercise to create pure plays should be able to help in unlocking value, as there is a focused management on individual business segments, and the conglomerate discount of Sime Darby could be removed as the conglomerate structure is removed,” he says.
The focus on individual companies in theory will help in generating value for shareholders of the group. For the longest time, Sime Darby’s holding company structure meant that operations that have lagged behind could find a crutch from the better performing businesses within the cluster of companies that Sime Darby owned.
It also served as a vehicle to take on new businesses which in recent years have flopped and caused much headache for shareholders. From buying a bank to getting involved in the construction of Bakun Dam to dipping its toes in the once lucrative oil and gas sector, those forays turned sour and caused huge write-offs for Sime Darby. But the group always had its steady core businesses to shoulder the risks that come with doing something the group has no experience in.
That will change at the end of the month when pure plays such as the plantation and property arms take flight on the stock exchange. Doing so will not only ensure that the investee companies exhibit discipline to carry out the business they were charged with, but also accountability in having independent boards and management that report directly to the shareholders.
The pricing conundrum
All eyes will be on what happens when the three companies start trading on Bursa Malaysia. The split and listing of the companies will happen at the end of the month and the reference prices published by Sime Darby indicate that Sime Darby Plantation and Sime Darby Property could be accorded a high price-toearnings (PE) ratio based on the range of the reference price in a circular to shareholders earlier this week. The market capitalisation of Sime Darby at RM9.05 is around RM61.5bil and that will be divvied between the three listed companies. Sime Darby Plantation will receive between 60% and 68% of that value and Sime Darby Property will get between 16% and 19%. The residual value will be given to Sime Darby.
Based on the percentage allocation of the reference price, Sime Darby Plantation, which will be the world’s largest listed oil palm plantation company, will have a market cap of between RM36.93bil and RM41.83bil upon listing.
Sime Darby Property is expected to have a value of between RM9.86bil and RM11.70bil and Sime Darby’s market cap is expected to be between RM8.03bil and RM14.76bil.
The decision on just what each company will be priced at will be determined by the board of Sime Darby, but questions have been asked about the valuation pre- scribed to Sime Darby Plantation, given that its contribution to group earnings is less than 50% of group earnings. One banker says that band took into account one-offs that had depressed the plantations earnings to the group compared with the other two entities.
Much of the debt post-listing will reside with Sime Darby Plantation. It will shoulder RM7.78bil worth of debt for a gearing of 0.48 times. As its cashflow is the strongest of the three, that should be adequately dealt with.
Sime Darby Property will carry a debt of RM2.1bil for a gearing ratio of 0.21 times, while Sime Darby will have RM3.2bil of debt and a gearing ratio of 0.2 times.
The debt of the group prior to the spilt was RM13.1bil with a gearing ratio of 0.32 times.
The general view is that Sime Darby Plantation will be the stock most investors will keep post-listing. It will be a long-term certainty to be a component stock of the FBM KLCI and that will see it draw the attention of institutional investors.
As Sime Darby prior to the listing was basically covered by plantation analysts, that would mean that most investors would be looking at Sime Darby Plantation as a core holding between the three stocks. Its possible PE ratio on listing day could be between 28 times and almost 32 times and will be below that of IOI Corp Bhd, which is seen as the top planter in Malaysia in terms of efficiency.
Sime Darby’s valuation will be higher than Kuala Lumpur Kepong Bhd, which carries a PE of 23 times, and Genting Plantations Bhd, which has a PE of about 19 times.
Sime Darby Property will have a price-to-book value of between one and 1.2 times post-listing based on the range of its reference price, putting it within range of the top prop-
erty developers in Malaysia.
With sales of Sime Darby Property lagging behind the other top names in the industry, there is doubt whether the property arm would be able to hold on to its value post-listing.
One morsel of information that investors may want to pay attention to is who helms the board of that company. With Wahid as its chairman, there is optimism that he will be able to translate his track record in the business world to Sime Darby Property. Wahid was instrumental in turning around top companies such as Telekom Malaysia Bhd and Malayan Banking Bhd and that has bought him a great deal of goodwill from top institutional investors.
A banker says that at a recent roadshow to Hong Kong, Singapore and Malaysia to inform large institutional investors of the demerger, there was little worry from those shareholders over Sime Darby Property’s ability to execute.
But the one company that will have little or no chance of a selldown appears to be Sime Darby. Although the grand old company will be a shadow of its former self after the plantation and property businesses are carved out, the entitlement date of the 17 sen dividend will be after the demerger takes place. Based on the reference price range for Sime Darby shares of between RM1.18 and RM2.17 a share, that would give it a dividend yield of between 14.4% and 7.8% a share if investors were to hold the shares up till the second week of December.
Post-listing
Whether value will be created from the demerger will not be judged from the first few days after the split takes place. As Sime Darby says in its circular, the restructuring is done to allow each standalone entity to focus on individual growth strategies. That will take time but the plan of action for the plantation and property businesses seems clear.
Sime Darby Plantation’s fresh fruit bunches for its financial year ended June 2017 was a blended 19.4 per ha per year. It is the highest in Papua New Guinea (PNG) where it has New Britain Palm Oil Ltd as its core holding generating almost 24 tonnes per ha. In Indonesia, the yield is 16 tonnes and with its tree profile ageing, there are plans to use the seedlings from PNG to hasten replanting efforts in Indonesia.
For Sime Darby Property, the fact that it is the largest property owner of land in Malaysia allows it to save on future landbanking costs. Call options to buy land from Sime Darby Property also give the company the flexibility to capitalise on future growth opportunities.
Furthermore, with Wahid helming the board, few would bet against Sime Darby Property improving its organic business to see sales catch up with the best in the industry.
The residual company in the entire corporate exercise might be the most intriguing.
Sime Darby will retain the trading and logistics businesses, which are concentrated on the distribution and selling of motor vehicles as well as heavy equipment throughout a number of countries in the AsiaPacific. Its logistics business involves port operations and water management in China.
The regional flavour of Sime Darby might appeal to regional institutional investors in the longer run, given how the economies of SouthEast Asia, China, Hong Kong and Australia perform.
The return of a positive commodities cycle will help in the sale of heavy equipment where Sime Darby distributes and sells brands such as Caterpillar.
Apart from that, a banker says that Sime Darby, which will not retain the big bumper dividend of 17 sen after it is divvied out to shareholders, may yet offer other longerterm corporate moves that may help in the attractiveness of the company.