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.

KLK or BKAWAN; which should be more enticing?

KLK or BKAWAN;  which should be more enticing?

Batu Kawan Berhad (an investment holding company of KLK) and Kuala Lumpur Kepong Berhad are the big boys of the local palm oil industry.

Batu Kawan Berhad is the largest shareholder (46%) of Kuala Lumpur Kepong Berhad. Both companies are chaired by the same board and operates in the same industry thus making them sister companies. However, which stock appears to be more enticing, and bringing this forward, which is a better buy?

I have computed the PE, Dividend Yield and Capital gains (3, 6 and 12 months) for both stocks for this comparison purpose.

KLK

KLK	3 months ended		12 months ended
	30/9/2010	30/9/2009	30/9/2010	30/9/2009
	000	000	000	000
Revenue	2,014,641	1,799,574	7,490,626	6,658,308
Net Profit	327,162	257,184	1,067,270	642,611
	cents	cents	cents	cents
EPS	29.21	22.89	95.06	57.51
7/2/2011
share price	22.7
PE	23.879655
		cents	DY in today's price
DY	2010	60	0.0264317
	2009	40	0.0176211
	2008	70	0.030837
	2007	50	0.0220264
	7/2/2011	7/11/2010	7/5/2010	7/2/2010
share price	22.7	19.78	16.38	16.58
	3 mths CG	6 mths CG	12 mths CG
	0.1476239	0.3858364	0.3691194

BKAWAN

BKAWAN	3 months ended		12 months ended
	30/9/2010	30/9/2009	30/9/2010	30/9/2009
	000	000	000	000
Revenue	57,263	55,922	224,426	238,148
Net Profit	148,403	107,314	569,195	341,687
	cents	cents	cents	cents
EPS	35.05	24.93	134.18	79.15
7/2/2011
share price	17
PE	12.66954837
		cents	DY in today's price
DY	2010	65	0.0382353
	2009	40	0.0235294
	2008	64	0.0376471
	2007	50	0.0294118
	7/2/2011	7/11/2010	7/5/2010	7/2/2010
share price	17	15.1	10.7	10.4
	3 mths CG	6 mths CG	12 mths CG
	0.125827815	0.588785	0.6346154

From the above tables, BKAWAN was able to achieve stronger capital gains on both 6 and 12 months. It also has a higher dividend yield as of the closing share price on the 7^th of February 2011. Thus this suggests BKAWAN was a better play.

In addition, BKAWAN may be able to even sustain this momentum when one looks at its PE ratio of 12.69 versus that of its sister company, KLK with PE of 23.88; almost doubling!! However, it is worth noting that BKAWAN should always have a lower PE since it is an investment holding company (pocketing RM310million in dividends alone from KLK in 2010). Since KLK carries the risk of operating the business, it should have a higher PE and reflect the volatility of the industry.