PP 7767/09/2010(025354)

RHB Research

Malaysia Corporate Highlights Institute Sdn Bhd

A member of the
RHB Banking Group
Company No: 233327 -M

V is it Note
29 April 2010
MARKET DATELINE

Sime Darby Share Price

Fair Value
:
:
RM8.76
RM9.70
Short-Term Weakness In FFB Production, But Long- Recom : Outperform
Term Sustainability Intact (Maintained)

Table 1 : Investment Statistics (SIME; Code: 4197) Bloomberg: SIME MK

Net Core EPS Cons. Net
FYE Turnover profit EPS gth PER EPS* P/NTA P/CF* ROE Gearing GDY
Jun (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009 31,013.9 2,255.2 37.5 (38.1) 23.3 - 2.6 17.1 10.6 10.7 2.5
2010f 31,855.9 2,377.5 39.6 5.4 22.1 45.0 2.6 15.6 10.9 17.2 2.5
2011f 35,294.9 2,904.6 48.3 22.2 18.1 54.0 2.5 13.1 12.6 20.1 3.3
2012f 39,784.0 3,056.2 50.9 5.2 17.2 59.0 2.4 12.4 12.7 24.1 3.9
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Six key takeaways from our recent visit: (1) Slower FFB
Issued Capital (m shares) 6,009.4
production in Indonesia now; (2) Longer-term FFB growth sustainable;
Market Cap(RMm) 52,642.3
(3) CPO price view unchanged; (4) Production costs to decline, but not Daily Trading Vol (m shs) 11.7
as significantly as seen in 1HFY10; (5) Property division picking up 52wk Price Range (RM) 6.25-9.24
speed; and (6) Capex higher than expected. Major Shareholders: (%)
♦ Slower FFB production in Indonesia now. Management is now Skim Amanah Saham
guiding for a decline in FFB production of between 5-7% yoy for Bumiputra 30.9
FY06/10 (versus the guidance of +5-8% yoy growth just two months Permodalan Nasional Bhd 17.0
ago), caused by the weather conditions as well as tree stress seen Employees Provident Fund 11.7
recently at its Indonesian estates. Although this is lower than our
FYE June FY10 FY11 FY12
projected FFB growth forecast of 6.1% yoy for FY10, we continue to EPS chg (%) (2.8) (6.4) (5.4)
believe there will be some growth in FFB production in FY10, albeit at a Var to Cons (%) (12.1) (10.5) (13.8)
smaller amount, given the recovery in production seen in Mar 2010, of
21.2% mom. We are revising our FFB production forecasts down to PE Band Chart
project a 1.8% yoy growth for FY10 (from 6.1% previously). For FY11- PER = 16x
12, we are now projecting FFB production growth of between 4.1-5.5% PER = 14x
PER = 12x
p.a. (from 4.2-4.4% previously), on the back of yield improvements in
Indonesia, assuming normal weather conditions. In the longer term.
however, future growth should come from an increase in mature areas
(as 10% of its planted landbank is immature) and an improvement in
age profile (as 20% of its landbank is between 4-8 years in age).
♦ Forecasts revised down by 2.8-6.4% p.a. for FY10-12, after: (1)
reducing our FFB yield and production estimates for FY10-12; (2)
Relative Performance To FBM KLCI
adjusting our new planting assumptions for FY10-12 based on
management guidance; (3) raising our sales projections for the
property development division for FY10-12; and (4) raising our capex Sime Darby
assumptions for FY10-12.
♦ Risks: (1) a reversal in crude oil price trend resulting in reversal of FBM KLCI

CPO and other vegetable oils price trend; (2) weather abnormalities;
(3) change in emphasis on implementing global biofuel mandates; and
(4) a slower-than-expected global economic recovery.
♦ Investment case. Post-earnings revision and adjustment of some of
the target PE valuations for Sime’s other divisions, we reduce our SOP-
based fair value for Sime to RM9.70 (from RM9.85). We have raised
our target PEs for the motor sector to 14x CY10 (from 12x previously),
the energy & utilities sector to 16x CY10 (from 15x), the heavy
equipment sector to 14x CY10 (from 13.5x) and the property sector to
14x CY10 (from 13.5x), to be in line with the recent upgrades in these
sectors’ target valuations. Maintain Outperform recommendation for
Hoe Lee Leng
Sime given its further potential upside from GLC reforms, additional
(603) 92802184
merger synergies and yield improvements from its Indonesian hoe.lee.leng@rhb.com.my
plantations.

Please read important disclosures at the end of this report.

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 29 April 2010

Visit Notes

♦ Six key takeaways from our recent visit: (1) Slower FFB production in Indonesia now; (2) longer-term
FFB growth sustainable; (3) CPO price view unchanged; (4) Production costs to decline, but not as
significantly as seen in 1HFY10; (5) Property division picking up speed; and (6) Capex higher than
expected.

♦ Slower FFB production in Indonesia now. In 9MFY06/10, Sime recorded FFB production growth of 3%
yoy, on the back of improvement in FFB yields, particularly after the weak production caused by the wet
weather in the previous year. However, we note that the rate of improvement is on a declining trend,
especially in view of the fact that in 3QFY10, Sime’s FFB production fell 4.7% yoy and 27.9% qoq. This was
mainly attributed to a decline in yields in Indonesia, particularly in Feb 2010. We understand that in Feb,
Indonesia’s production was down about 5% yoy (versus +10% yoy in Jan), while production in Malaysia fell
approximately 13% yoy (versus -10% yoy in Jan). Going forward, management is now guiding for a
decline in FFB production of between 5-7% yoy for FY06/10 (versus the guidance of +5-8% yoy growth
just two months ago), caused by the weather conditions as well as tree stress. Although this is significantly
lower than our projected FFB growth forecast of 6.1% yoy for FY10, we continue to believe there will be
some growth in FFB production in FY10, albeit at a smaller amount than our original assumptions, given the
recovery in production seen in Mar 2010, of 21.2% mom. We are therefore revising our FFB production
forecasts downward to project a 1.8% yoy growth for FY10 (from 6.1% previously). For FY11-12, we are
now projecting FFB production growth of between 4.1-5.5% p.a. (from 4.2-4.4% previously), on the back
of yield improvements in Indonesia, assuming normal weather conditions.

♦ Longer-term FFB growth sustainable. In the longer term, Sime expects future growth to come from an
increase in mature areas (as 10% of its planted landbank is immature) and an improvement in age profile
(as close to 20% of its planted landbank is between 4-8 years in age). In Malaysia, Sime has unplanted
landbank of approximately 33,520ha, while in Indonesia, Sime has got unplanted landbank of about
67,255ha (as at end-FY06/09). However, out of this unplanted landbank, only about 20,000ha is plantable
(all in Indonesia), which Sime intends to fully plant up by end CY2010. Subsequently, Sime will concentrate
on planting up its 220,000ha landbank in Liberia. Sime has already set up a nursery in the first phase of its
estate in Liberia, and has a long-term target of planting up 100,000ha in Liberia by 2015. By end-CY2010,
Sime intends to plant up 10,000ha of land, and continue planting up 20,000-25,000ha per year
subsequently. Development cost of the initial 10,000ha is estimated at RM60-70m, which includes the cost
of a CPO mill, and is to be spent over FY10-11. Excluding the mill cost, we estimate development cost to be
approximately RM20-30k/ha, which may seem on the high end versus Malaysian and Indonesian plantation
development cost of RM12-15k/ha. However, we note that this cost would also include basic infrastructure
costs like roads, housing etc, which would be non-existent in Liberia, as well as ensuring the estate
standards are in line with RSPO guidelines. We note that the capex for this land development has already
been included in our capex assumptions for FY10-11.

♦ CPO price view unchanged. Sime has not changed its CPO price view or its forward selling policy, and
continues to sell up to 20% of its production three months forward. Given the currently higher price levels,
we maintain our CPO price assumption of RM2,450/tonne for FY10.

♦ Production costs to decline, but not as significantly as seen in 1HFY10. Sime’s CPO production cost
in 1HFY06/09 was around RM1,000/tonne (excluding kernel credit), which was a 10% decline yoy.
However, we believe this decline may not be sustainable in 2HFY10, due to the lower productivity seen in
Indonesia recently, and the potentially higher labour costs. As such, we maintain our more conservative
projection of a 5-6% p.a. decline in production costs in FY10.

♦ Property division picking up speed. The property division has picked up speed in the last quarter of
FY06/10, in terms of property launches as well as sales of unsold stocks. We understand that up to Feb
2010, property sales have already touched close to RM1bn, which is 80% of our FY10 sales projections.
We, therefore, revise up our topline growth assumption for FY10 to reflect a 9.6% yoy growth (from 3.2%
previously) for the property development division. Going forward, we believe there will be a stronger
recovery from FY11 onwards, as Sime’s property launches have resumed while property sales (especially in
the Klang Valley) have been very active of late. According to some media reports, Sime intends to launch
one new property project a month for the next six months, which would include launches for its KLGCC
townhouses (GDV approximately RM200m for 120 units), residential units in Denai Alam, USJ Heights and
Bukit Jelutong. The latest phase of its Ara Damansara development, Seri Pilmoor, which has a GDV of
RM469m, which was launched in Mar 2010, was sold out within 1.5 days. Sime targets to achieve property

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 29 April 2010

sales of RM1.5-2bn p.a. every year for the next six years, on the back of its remaining undeveloped
property projects, which is in line with our forecasts.

♦ Capex higher than expected. Sime projects capex for FY10 to be around RM3.4bn, which is higher than
our projected RM3bn. The increase, we believe, comes mainly from additional expenditure required for its
China refinery expansion, which we had not included in our forecasts previously, as well as increased
expenditure for the energy & utilities division’s expansion in China. Out of the total capex, approximately
RM1.8bn would be used in the plantations division (for refineries in Malaysia, Indonesia and China as well
as new planting cost), RM0.7bn for the energy & utilities division, RM0.45bn for the industrial division and
RM0.45bn for the other divisions. We have, therefore, raised our capex assumptions for FY10-12 to RM3-
3.4bn (from RM2.5-3bn previously).

Risks

♦ Risks to our recommendation include: (1) a convincing reversal in crude oil price trend resulting in
reversal of CPO and other vegetable oils price trend; (2) weather abnormalities resulting in an over or
under supply of vegetable oils; 4) increased emphasis on implementing global biofuel mandates and trans-
fat policies; and 5) a slower-than-expected global economic recovery, resulting in lower-than-expected
demand for vegetable oils.

Forecasts

♦ Forecasts revised down by 2.8-6.4% p.a.. All in, we reduce our core net profit forecasts for Sime by
2.8-6.4% for FY10-12, after: (1) reducing our FFB yield and production estimates for FY10-12; (2)
adjusting our new planting assumptions for FY10-12 based on management guidance; (3) raising our sales
projections for the property development division for FY10-12; and (4) raising our capex assumptions for
FY10-12.

Valuation and Recommendation

♦ Maintain Outperform. Post-earnings revision and adjustment of some of the target PE valuations for
Sime’s other divisions, we reduce our SOP-based fair value for Sime to RM9.70 (from RM9.85) (see Table
2). We have raised our target PEs for the motor sector to 14x CY10 (from 12x previously), the energy &
utilities sector to 16x CY10 (from 15x), the heavy equipment sector to 14x CY10 (from 13.5x) and the
property sector to 14x CY10 (from 13.5x), to be in line with the recent upgrades in these sectors’ target
valuations. Maintain Outperform recommendation for Sime, given the further potential upside from GLC
reforms, additional merger synergies and yield improvements from its Indonesian plantations.

Table 2. Sum-Of-Parts Breakdown

Division Valuation method Value (RMm)
Plantations CY10 PE 18x 43,216.9
Property CY10 PE 14x 5,310.3
Motor CY10 PE 14x 3,168.5
Heavy Equipment CY10 PE 14x 11,210.8
Energy & Utilities CY10 PE 16x 3,841.6
Others CY10 PE 14x 272.0
Net Cash / (Debt) End 2QFY10 (2,098.0)
TOTAL 64,922.1

No. issued shares 6,009.4

SOP/share (RM) 10.80

Less: Holding co discount 10% (1.08)

Fair Value/share (RM) 9.72

Source: RHBRI

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 29 April 2010

Table 3. Earnings Forecasts Table 4. Forecast Assumptions

FYE Jun (RMm) FY09a FY10F FY11F FY12F FYE Jun FY10 FY11F FY12F

Turnover 31,013.9 31,855.9 35,176.4 39,784.0 CPO Price (RM/tonne) 2,450 2,600 2,500
Turnover growth (%) (8.9) 2.7 10.4 13.1 FFB Production Gth (%) 0.5 2.5 1.6

Operating Costs (28,901.9) (29,435.7) (32,213.9) (36,597.1) Heavy Equipmt Op Profit Gth (14.2) 19.6 15.8
(%)
Operating Profit 3,126.1 3,461.9 4,112.6 4,487.7 Energy & Utilities Op Profit 314.0 13.6 8.6
Gth (%)
Property Op Profit Gth (%) 16.4 26.1 18.4
EBITDA 3,944.3 4,459.4 5,215.8 5,690.9 Motor Op Profit Gth (%) 24.0 5.0 5.0
EBITDA margin (%) 18.3 19.3 20.3 21.3

Depreciation (818.2) (997.5) (1,103.1) (1,203.2)

Net Interest (93.9) (169.3) (244.5) (299.6)
Associates 14.5 100.0 90.0 99.0
Exceptionals 24.9 0.0 0.0 0.0

Pretax Profit 3,071.6 3,392.6 3,958.1 4,287.1

Tax (730.8) (916.0) (989.5) (1,071.8)
PAT 2,340.8 2,476.6 2,968.6 3,215.3
Minorities (60.7) (99.1) (148.4) (160.8)
Discontinued ops 0.0 0.0 0.0 0.0
Net Profit 2,280.1 2,377.5 2,820.2 3,054.6
Core Net Profit 2,255.2 2,377.5 2,820.2 3,054.6

Source: Company data, RHBRI estimates

Chart 1: Sime Technical View Point

♦ The share price of Sime began rallying since late
Mar 2009, and the uptrend was smooth until it
reached a resistance level near RM9.00 in late Oct
2009.

♦ Although it has managed to hit a high of RM9.19 in

Jan 2010, sellers have constantly appeared above
the RM9.00 region.

♦ The stock was trimmed to a low of RM8.28 in Feb

2010, but regained its upward momentum slowly
and it recently trended closer to the RM9.00 hurdle
again.

♦ Chart wise, at the close of RM8.76, the stock has

yet to trigger any clue for its near-term direction.

♦ However, as it remains close to the resistance level

of RM9.00, we expect it to stabilise between
RM8.40 and RM9.00 region in the near term.

♦ It will only turn negative if it breaches below the

previous low of RM8.28 and the key support range
of RM8.00, in our view.

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or
be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or

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strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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actions of third parties in this respect.

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