Sime Darby’s share price is fairly valued based on its KPI expectations

Sime Darby, a conglomerate operating in the divisions of plantation, property, industrial, motors, energy & utilities, and healthcare has set a Key Performance Indicator (KPI) NPAT of RM2.5b for FY ending 30 June 2011. This comes after operating losses of RM1752m for FY2010 in the energy and utilities sector. Total provisions for losses and impairment total RM2085.7m for both quarters March (RM1308.4m) and June 2010 (RM777.3m) in the energy and utilities sector.

Sime Darby’s Key Financial Information:

	30/9/2010	30/6/2010	31/3/2010	31/12/2009	30/9/2009
	RM'000	RM'000	RM'000	RM'000	RM'000
Revenue	8,782,934	9,211,813	7,570,697	8,432,702	7,736,401
Profit/(loss) before tax	940,644	25,049	-48,933	783,152	982,236
Profit/(loss) for the period	687,900	-53,258	-277,537	464,796	720,808
Profit/(loss) attributable to ordinary equity holders of the parent	654,742	-77,353	-308,630	428,191	684,641
	cents	cents	cents	cents	cents
Basic earnings/(loss) per share (Subunit)	10.89	-1.29	-5.14	7.13	11.39
Proposed/Declared dividend per share (Subunit)	0	3	0	7	0

Will they be able to achieve the KPI?

The pressure is definitely on since Sime is a huge conglomerate and its reputation is at stake after suffering two consecutive quarters of losses.

Upside: Plantation sector which accounts for 29% of group revenue in the latest quarter will see significant improvement in the upcoming reporting period due to the increase in CPO price. The average CPO for the last reporting quarter was RM2511 vs. the average spot settlement price of CPO in the months Oct, Nov and Dec is RM3222; representing an increase of 28%. This will significantly improve revenue contributions from the plantation segment.

The energy and utilities division is back in the black, showing significant improvements in turning around this sector.

Sime also plans to strengthen corporate governance and thus is implementing a two-tier board structure for the purpose of improving accountability.

sime	shares	6009500000
	Earnings FY 2011	RM2500000000
	EPS	RM0.416
	Share Price 8/2/11	RM9.35
	PE	22.48

Fair Value: Assuming that Sime meets its KPI, its share price currently reflects a PE of 22.48. Local industry PE is averaging at 19 excluding outliers.