Plantation asset demerger to unlock value for Sime Darby

PETALING JAYA: Sime Darby Bhd may opt to demerge its plantation business while merging its property division under Permodalan Nasional Bhd's (PNB) asset portfolio in a bid to create better value for existing shareholders, says UOBKayHian Research.In a note Wednesday, the research firm said the demerger of the plantation division could fetch better valuation compared with Sime's automotive or property segments.

"The demerger of the plantation business would be supported by rising crude palm oil (CPO) prices and the recovery in fresh fruit bunch (FFB) yields as well as FFB production cost after the severe drought," it said.

PNB, under the leadership of chairman Tan Sri Abdul Wahid Omar, has been exploring new strategies to unlock the value of its holdings.

The strategic fund is a major investor in Bursa Malaysia with some RM170bil worth of share investments, constituting about 10% of the entire stock exchange value. It is also the largest shareholder in Sime with a 42.55% stake.

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According to UOBKayHian's calculations, Sime's plantation business may be worth as much as RM50.9bil based on the average market value of recently transacted deals.

Under the most optimistic scenario, the demerger will enhance the group's value, implying a 19% upside to its current share price.

However, the downside of this option is that the rest of Sime's holding company assets could trade at huge discounts following the demerger of the plantation business.

UOB currently has a "hold" call on Sime with a target price of RM8.65. The stock closed at RM8.52 yesterday, an increase of three sen from Tuesday.

Another option is for the merger of Sime Darby Property Bhd with other property companies under PNB to form a mega-developer, which has been speculated for some time.

"Assuming a 40% discount to the realisable net asset value, the property division could be valued at RM11.6bil.

Although this exercise might not increase group value significantly, we are positive on this option as Sime will be able to better focus on its other businesses post the restructuring plan," UOB explained.

External sentiment could also have a bearing on Sime's stock price. The research house noted that about three months before the 2013 general election (GE), Sime's shares moved up by about 1.9%, outperforming the 0.3% decline recorded by the KL Plantation Index.

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UOB reckons that Sime could be one of the large-cap plantation stocks that would be indirect proxies to better market sentiment driven by the elections.

However, it noted that Sime's shares have already shown a strong performance after having risen by 12% since October, which indicates that the GE factor could have already been factored in.

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