Sime Darby - Margins hit hard, 9MFY15 below expectations HOLD, 22 MAy 2015

We downgrade Sime Darby to HOLD, with a lower SOP fair value of RM9.00/share (vs. RM10.58/share previously) following the release of its 9MFY15 result that came in significantly below expectations.

We cut our FY15F net profit by 31% to RM1.6bil, with an 8% downward adjustment to the average CPO price assumption to RM2,170/tonne as well lower sales assumptions for the industrial and motor divisions.

Sime Darby posted a core net profit of just RM119mil (-70% QoQ, -84% YoY) for 3QFY15, bringing the 9MFY15 earnings to RM954mil – accounting for only 41% and 37% of our previous and consensus estimates. No dividend was declared.

Its net profit of RM1.32bil for 9MFY15 included gains of RM226mil on cross currency swap contracts and gains of RM56mil from the disposal of associate. The plantation and industrial divisions accounted for the bulk of the decline.

For 9MFY15, the plantation and industrial divisions’ est. EBIT fell 47% and 55% to RM656mil and RM357mil, respectively, while the motor division’s est. EBIT fell 30% to RM267mil. Group EBIT margin decreased by 2ppts.

For plantation, the average CPO price at RM2,171/tonne was 11% lower than that of RM2,439/tonne a year earlier. FFB output in Malaysia and Indonesia fell by 7.8% and 7.3%, respectively, due to a change in cropping pattern driven by severe weather conditions.

Industrials saw a continued downturn in the Australian mining industry which led to lower equipment deliveries and product support sales. Malaysia, Singapore and China saw softer market conditions amid intense competition.

The property division’s EBIT nearly tripled to ~RM500mil from a year earlier, on the back of progress at the Elmina East (Selangor) and Taman Pasir Putih (Johor) townships and increased contributions from the construction progress of the Pagoh Education Hub project. Unbilled sales stood at RM1.8bil as at 31 March 2015 vs. RM2.4bil three months earlier.

The utilities division’s EBIT soared to nearly RM100mil, mainly due to the improved performance in general cargo and container throughput at the Weifang and Jining Ports.

Downgrade to HOLD, following the lower-than-expected 9MFY15 results and the anticipated delay of the proposed listing of its auto division and the continuing anaemic performances of the plantation and industrial divisions.