Today’s Sime Darby is the outcome of the 2007 mergers of 3 Malaysian corporate giants

By MARK RAO

Sime Darby Bhd’s pure play strategy could work with institutional and private investors who seek focused companies instead of large conglomerates, said analysts.

Today’s Sime Darby was the outcome of the 2007 mergers of Malaysian giants—Sime Darby, Kumpulan Guthrie Bhd and Golden Hope Plantations Bhd — and listed under the “Sime Darby Bhd” name with a market capitalisation of RM59.5 billion then.

Affin Investment Bank Bhd director and head of equity capital markets Arvin Chia Yew Kim said the country’s capital market has been shifting away from conglomerate structures over the years and into “specialised” equities.

“Conglomerates and multinational companies were the trend 10 to 15 years ago. But, we are now heading in the direction where better valuation can be derived from specific markets, within specific industries.

“Investors now prefer direct exposure to individual stocks as the emerging preference, subsequently with the valuation of conglomerates coming down over the years,” Chia told The Malaysian Reserve (TMR).

Sime Darby, the fourth-largest stocks based on market capitalisation, is separating its plantation and property into individual listed entity to unlock the values of these core businesses.

After the exercise, the corporate giant will operate as three separate entities. Listing of the property and plantation divisions are expected in November this year.

The holding company will retain the trading and logistics, automotive and industrial sectors.

Chia said the separation of business will help in the valuation and reduce investors’ exposure to other segments.

“Investors are interested in a company for one sector, are forced to be exposed to other industries within the conglomerate structure,” he said.

Chia believed that the listing of the two entities will be received by the market, despite the subdued response to initial public offering (IPO).

Sime Darby’s pure play is a nominal IPO exercise, geared towards separately listing the plantation and property divisions.

“The exercise will not be a pure IPO and is not aimed at fund raising purposes. The end-goal is to establish the three individual entities,” Chia said.

“How the market values them post-listing will provide a better gauge of the valuations of each business entity.”

The listing of Sime Darby Plantation Bhd, the world’s largest palm oil producer based on landbank, is expected to be the top counter among the three pure plays, as the division is the key revenue generator.

TA Securities Holdings Bhd research analyst Angeline Chin said Sime Darby is currently trading at a high above the industry average, with the plantation business contributing the bulk of the group’s financials.

“Most of the risks will come from the industrial and property divisions, with the latter also dependant on the currency exchange performance,” Chin told TMR.

For its fourth-quarter ended June 30 this year, Sime Darby posted a 53.6% year-on-year net profit decline to RM571 million, after recognising RM684 million in impairments across four of its five major divisions.

The impairments — the highest incurred by the multinational — was absorbed by the group to ready itself for the proposed corporate restructuring.

Excluding impairment and provision for onerous contracts, profit from the industrial business was down 25.8% to RM253 million for the fiscal year (FY17), attributable to lower engine deliveries to oil and gas and marine sectors in Singapore, project delays in Hong Kong and intense competition in Australasia.

The property division also took a hit in FY17, registering a 32.1% decline in operating profit to RM801 million due to lower gains from asset monetisation and compulsory land acquisitions.

However, the motors and plantation sectors turned in a strong showing for the year, benefitting from better contributions from the Malaysia, China and New Zealand markets.

Affin Investment Bank’s Chia said Sime Darby’s planned demerger comes at an opportune time, with the automotive division surprisingly turning in a strong fiscal performance, despite a challenging and competitive operating environment.

He added that the property sector could be at, or near the bottom, and be primed for an upturn in the near future.

“The jury is still out on the property sector, although signs indicate it is heading for a rebound though not to full capacity.”