01 May 2012
Sime Darby expects slowdown in equipment demand from China, but defensive plantation business, decent dividend yield and good earnings visibility warrants a buy recommendation, target price RM12.05 - UOB Kayhian Research
(SIME closing stock price today (30.4.2012) was RM 9.74)
ON a recent non-deal roadshow with Sime Darby Bhd in Taipei, key concerns that were raised among other fund management houses were on how the slowdown in China’s economic growth would affect the group’s industrial and motor businesses.
It was a surprise that Sime has a sizable exposure in China.
Sales growth in China is slower than management’s target but this is mitigated by the stronger performance in Malaysia. Although the industrial division’s exposure in China is relatively small, the slowdown is offset by stronger sales in Australia with the additional models coming from Bucyrus distribution rights.
We expect the industrial division to deliver 10% to 15% growth for financial year ending June 30, 2012 (FY12) driven mainly on the back of mining equipment demand from Australia. Its current orderbook stands at about RM4bil and this should last for the next 18 months. Of the total, 50% are orders for Bucyrus products.
The management expects there will be slowdown in equipment demand from China, especially in Southern China, due to a slowdown in property and infrastructure projects. In addition, mining activities in Xinjiang are still very much at the beginning stages. It is dependant on how fast the local government can set up the necessary infrastructure.
Given the high coal reserves in Xinjian, Sime views this as the next strong market that will deliver similar contributions as Australia.
Guidance from management is for a 3% to 4% year-on-year production growth, which is lower than our expectation of 7% to 9%. It highlighted that it has been putting in constant effort to reduce cost, improve fresh fruit bunch (FFB) yield and oil extraction rate (OER).
Assuming that Sime manages to cut its cost of production by RM100 per tonne, improve its FFB yield by 1 tonne per ha and OER by 1% point, every RM100 per tonne increase in crude palm oil price (CPO) will increase Sime’s earnings before interest and tax by RM1bil.
There are no changes to our earnings forecast. We do expect earnings per share of 71 sen, 81.7 sen and 91.6 sen for FY12, FY13 and FY14 respectively.
We therefore maintain a “buy” recommendation with a target price of RM12.05. We continue to like Sime for its defensive plantation business, decent dividend yield of 3.6% and good earnings growth visibility.
Its share price catalysts include a surge in CPO prices and stronger demand for the motor and industrial division’s products.
Note: Indonesia had just announced an increase in crude palm oil (CPO) export tax from 18% to 19.5%. Sime Darby website indicates that it has a presence in eight provinces in Indonesia with a total landbank of 285,571 hectares out of which 207,889 are planted with oil palm, representing approximately 40% of the company’s total planted area.