Sime Darby on robust upside growth track

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STRONG GROWTH POTENTIAL: Photo shows an electric rope shovel made by equipment manufacturer Bucyrus which has been acquired by Sime Darby. The group’s industrial division may show the strongest growth amongst all divisions for the next few years given the strong mining activities, according to AmResearch. — Bloomberg photo

KUCHING: Sime Darby Bhd (Sime Darby), a Main Market listed and multi-faceted conglomerate, has been regarded to be on an aggressive growth path moving forward as its plantation, mining and automotive interests are expected to blossom in the future.

Stating this in a research report yesterday, AmResearch Sdn Bhd (AmResearch) elaborated, “We like Sime Darby mostly because 60 per cent of its earnings before interest and tax (EBIT) would come from the plantation business.

“Crude palm oil (CPO) prices will be robust this year, for which we expect an average of at least RM3,300 per tonne (current spot price – RM3,333 per tonne) due to supply constraints and strong demand.

“The acquisition of Bucyrus (a mining equipment manufacturer) will enhance Sime Darby’s position within the Australasia market, of which it already has a 70 per cent share.

“We are now incorporating the acquisition, which will add RM100 million to the division’s EBIT per annum.

“Plus, we believe the division – which contributes about 15 per cent to Sime Darby’s EBIT – may show the strongest growth amongst all divisions for the next few years given the strong mining activities,” the research house opined.

On the automotive division, Am Research stated that Sime Darby was well-entrenched in the luxury vehicle segment in China, the world’s largest auto market.

While vehicle sales in China were expected to be slow this year, it believed the luxury car segment in China would remain resilient while expecting Sime Darby’s auto sales in China to still show a decent growth of 10 to 15 per cent, compared with 30 to 40 per cent in the previous years.

Nonetheless, non-China markets would show the strongest growth to be underpinned by the launch of new BMW 3-series and two new Hyundai models in the second quarter of 2012 in Malaysia and Singapore, the report noted.

Moving on to the group’s acquisition of a 30 per cent stake in property player Eastern & Oriental Bhd, the research house believed a joint venture between the two would enhance Sime Darby’s massive landbank of 11,500 acres.

AmResearch rolled out a higher sum of parts (SOP) derivative due a higher price earnings (PE) target for the plantation division at 18 times, stronger earnings from the plantation sector as it raised CPO price assumption and a higher earnings estimate for the industrial business as it incorporated the recent acquisition of Bucyrus.

“Sime Darby’s balance sheet is healthy with a current net gearing of about 30 per cent. The group is looking at allocating RM6 billion for its financial year 2013 forecasted (FY13F) capital expenditure, with 30 per cent of it to be channeled to the plantation business.

“It has a payout policy of up to 50 per cent; we have assumed a payout 48 per cent which will give a yield of 3.4 per cent to 3.9 per cent for FY12F to FY14F,” the research house stated.

AmResearch revised the group’s fair value to RM11.80 per share (from RM10.60 per share previously) based on a 10 per cent discount to its revised SOP value of RM13.10 per share (versus RM11.77 per share previously).