Wednesday, September 21, 2011

Sime Darby stages mild rebound, selling overdone

KUALA LUMPUR: SIME DARBY BHD []'s share price stage a mild rebound on Wednesday, Sept 21, after analysts said the recent battering of the stock -- sparked by concerns about the acquisition of the Eastern & Oriental Bhd (E&O) stake -- was overdone.

At 11.48am, it was up 20 sen to RM8.11 with 3.94 million shares done.

The FBM KLCI rose 6.91 points to 1,417.55. Turnover was 287.28 million shares valued at RM406.69 million. There were 229 gainers, 218 losers and 247 stocks unchanged.

UOB Kay Hian Malaysia Research said on Wednesday, that Sime's share price fell 11% from RM8.70 on Sept 13 to RM7.70 on Sept 19'' due to concerns over the E&O acquisition, causing its market capitalisation to shrink by RM6 billion.

'Notwithstanding concerns over premium pricing and the potential general offer (GO), acquiring E&O will allow Sime to leverage on E&O's stronger branding in the higher-end property market, the development exposure in Penang and the prestige of developing wellness township with Singapore's Temasek in the Iskandar region,' it said.

UOB Kay Hian Research said the experienced and aggressive existing management team of E&O would enhance Sime's property development business through knowledge sharing and leveraging on E&O strength.

'We agree that the price paid for the 30% stake in E&O is pricey but this could be due to management's optimism on property and eagerness to turnaround its property arm by leveraging on E&O's stronger branding and management to beef up its current property team.

'We do not view this as a corporate governance issue and the RM6 billion drop in market capitalisation is overdone, even assuming a full GO of E&O of RM2.55 billion,' it said.

UOB Kay Hian Research said given the unclear scenario on the GO issue, investors prefer to stay out of the stock in the current volatile market. Management's view is that the deal does not trigger any unlawful misconduct.

'Based on E&O's RNAV valuation excluding Sri Tanjung Pinang 2 of RM1.51/share estimated by our property analyst, Sime is paying about 52.3% premium to E&O RNAV/share of RM1.51. This represents a

potential value erosion of only approximately 4sen/share assuming no GO. In the worst case scenario, ie a GO for E&O, the potential value erosion is estimated at 15 sen/share,' it said.

UOB Kay Hian Research said it was maintaining a BUY with target price of RM10.40 based on sum-of-the-parts.

'Maintain BUY for Sime's defensive PLANTATION [] business, decent dividend yield of 4.1% and good earnings growth visibility. Sime's below market FY13F PE of 12 times and low foreign ownership suggest limited downside. Sime's target price will fall only modestly from RM10.40 to RM10.25 even in the worst case scenario of a value erosion of RM0.15/share, assuming a potential GO,' it said.

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