Sime Darby - more near term upside?
- The mega-merger has yet to prove that it has effectively improve its bottom line but many feel that it has so much room to improve, it presents an arbitrage opportunity and a value buy compared to its peers
- IOICorp CPO production cost was about RM730 per tonne in FY2007 while Sime was RM1,100 per tonne; a modest improvement by RM250 per tonne will result in a 13% enhancement in profits or RM600mil
- The low yield for Sime's Indonesian plantation is its biggest drag, and the plantation group is said to be addressing "best practices in estate management" to bring it up to par with the other major players
- Currently, Sime's fresh fruit bunches (FFB) yield per mature hectare is 19 tonnes (IOICorp 26.7 tonnes, KLK 22.3 tonnes)
- Citigroup also reported that for every 100 per tonne rise in CPO price above Sime's average RM2,761 per tonne in FY2008 should lift the group's net profit by 3.8%
- At present, 70% of Sime's profit is derived from the palm oil business
- Positive newsflow from Bakun may lead to a positive re-rating also
- Also worth noting is Sime's improved motor division, it is boosted by a rebound from a loss of RM2.3mil to a profit of RM126.5mil
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