Should Sime List its Plantation Sector?

After bluntly telling Maxis to return home to re-list in the Bursa, PM Najib has hinted in the clearest terms for Sime Darby to go fully plantation and to dispose its other loss making business.

In true Malaysian fashion of Malaysia Boleh, PM Najib is telling the GLCs such as Sime to shape up or ship out.

A good time for a company to shape up nowadays is when the PM chastised you.That seems to be the trend.

Sime Darby obviously needs a big overhaul. It should consider listing its prized plantations business and selling its underperforming motor unit to boost valuations and compete better with fast-growing rivals.

Competitors to Sime such as Singapore-listed Wilmar and Indonesian Astra Agro Lestari have emerged as key beneficiaries of recovering palm oil prices driven by better growth potential and a greater focus on commodity businesses.

Shackled by an unwieldy gamut of businesses from property in China to selling BMW cars in Malaysia, Sime risks losing its No. 1 slot unless it overhauls its sprawling empire to focus on boosting palm oil yields, the key determinant of profitability.

Plantations accounted for about 74 per cent of Sime Darby's 2008 profit with the rest coming from property, motor, heavy equipment and energy, according to company data.

Majority-owned by the state asset manager and the Employees Provident Fund, Sime Darby's business model bundles the cash-generating plantations operations with other less profitable divisions such as the motor unit.

Investors are already taking note. Wilmar's shares have surged 120 per cent and Indonesia's top planter, Astro Agro is up 86 per cent versus a 60 per cent rise in Sime Darby's stock. Wilmar is valued at US$27 billion (RM95 billion) while Sime has a valuation of US$14 billion.

While Wilmar's EPS is set to shrink 35 per cent in Jan-Dec 2009 and Astra Agro's EPS is e expected to drop 25 per cent, earnings per share at Sime Darby, whose financial year ends in June, is expected to fall 44 per cent in fiscal 2009.

Sime Darby, created through a merger between three plantation groups in 2007, holds 844,000 hectares of plantation land that spreads over Asia and Africa, making it the world's largest land bank.

Indonesian plantation firms, equipped with vast land resources, are growing fast and could overtake Sime.

Sime Darby is trading on a 2009 forecast price to earnings multiple of 25, the same as rival IOI Corp and lower than Wilmar's 28. It's return on equity at 9.2 per cent is lower than 14 for IOI and 13.6 for Wilmar and 33 for Astra Agro.

So, making an plantation IPO makes sense!

Many investors want Sime to list its crowned jewel division to enhance its appeal as a pure play plantations firm.

Sime should consider an IPO next year because valuations could be more attractive when equity and crude palm oil markets get on to a better footing.

Many suspect that this was what Wilmar is aiming for.

Apparently, Sime Darby is not ready to do this anytime soon, that was their official reply.

Some analysts say Sime Darby could follow in the footsteps of Indonesia'a finance-to-automobiles conglomerate PT Astra International Tbk, which separately listed its plantations business Astra Agro more than a decade ago.

Astra Agro stands as a pure oil palm estate owner, offering investors a direct exposure to its lucrative plantation cash-flows and into the global palm oil industry worth US$45 billion annually or even more.

"Something like Astra... would be positive for Sime in terms of a purer plantation play. Of course, investor interest would be more on the plantation one rather than its holding company," said an analyst of a foreign brokerage in Kuala Lumpur.

Despite its size, Sime benefits the least from a positive crude palm oil price trend according to Morgan Stanley.

A 10 per cent rise in CPO prices adds only 5 per cent in Sime earnings while such a swing would raise Astra Agro's earnings by 13 per cent, the investment bank said in a note.

But a spin-off of the plantations business, may not go down well with Sime Darby, which has said it wants the company to remain a conglomerate.

It has recently added to its diverse portfolio with new acquisitions in energy and health-care.

That may be so, but will they defy the PM and earn his wrath? Not those people at the helm of Sime who are so enamoured to the PM for the extension of their Chairmanship as well as Board membership They will only do so at their own behest!If they should screw up, there will be many such as the likes of Azman Mokhtar who will be waiting in the wing to take over this global giant of a company!