Sime Darby 4QFY08 in line - Positive dividend surprise

NEUTRAL Maintained
RM6.45
Target: RM7.50
Mkt.Cap: RM38,761m/US$11,488m
27 August 2008

Broadly in line. Sime Darby’s FY6/08 core net profit was 4% above our forecast and 1% above consensus estimates, courtesy of higher FFB yields, better CPO prices and merger synergies. Its estates in Malaysia recorded an average CPO price of RM3,014 per tonne against our forecast of RM2,850 per tonne. FFB yields achieved were also around 1 tonne/ha above our estimate. Other key divisions performed broadly in line with our expectations.

Positive dividend surprise. A final gross dividend of 34 sen and special dividends of 4 sen gross plus 6 sen tax exempt were declared, bringing the total dividend for the year to 49 sen (inclusive of a 5 sen interim dividend). The final dividend payout is 4 sen above our forecast of 45 sen and equates to a payout ratio of 82% against our forecast of 78%.

Outdid KPI by 13%. The group comfortably exceeded its FY08 net profit KPI of RM3.15bn by 13% due mainly to better CPO prices and higher merger benefits. Management revealed that they realised RM210m merger synergies in the plantation and property divisions, which is equivalent to about half of the RM400m-500m target for EBIT enhancement by FY09-10.

Cutting earnings forecasts. We are chopping our earnings forecasts for FY09- 10 by 10-14% mainly for rising operating costs at the plantation unit, lower property sales and margin in view of weak consumer sentiment and rising raw material costs, weaker motor sales and higher unallocated costs. There is downside risk to our FY09 net profit as we are reviewing our CPO price forecasts. Every RM100 per tonne change in our CPO price assumption would have a 4% impact on Sime Darby’s earnings.

Maintain NEUTRAL call with reduced target price of RM7.50. Although we retain our target basis of 10% discount to SOP, our target price is crimped by 60 sen to RM7.50, mainly because of earnings downgrade. The group’s high dividend yield and potential M&A offset somewhat our concern over the weak CPO price prospects. We reiterate our NEUTRAL recommendation.