KUALA LUMPUR - CIMB Equities Research has lowered its target price for Sime Darby from RM10.47 (S$4.07) to RM10.13.
It said on Monday that Sime's core net profit for the first quarter ended Sept 30, 2013 (1QFY6/14) was below expectations, being only 14 per cent of its FY14 forecast and 13 per cent of consensus.
"The poor showing resulted from lower-than-expected FFB output, weaker performances from its industrial and motor divisions and higher tax rates," it said.
CIMB Research said while it expects higher CPO prices to raise plantation earnings in the subsequent quarters, it also expects the challenging conditions facing the other divisions to prevail.
"We cut our earnings forecasts by 1 per cent-9 per cent to reflect weaker 1Q earnings from key divisions. This lowers our SOP-based target price. But our Neutral call is intact given the stock's inexpensive P/Es relative to its big-cap peers in Malaysia and decent dividend yields," it said.
To recap, CIMB Research said the 1Q14 core net profit fell 51 per cent on-year and 63 per cent on-quarter due to weaker contribution from all key divisions. Plantations and motor were the biggest drags on earnings.
Plantation profits were affected by a 16 per cent drop in fresh fruit bunches (FFB) output due to a change in cropping pattern and biological tree stress.Production dropped by 26 per cent for Sime's Indonesia estates and 8 per cent for its estates in Malaysia.
Motor earnings were hit by weak consumer sentiment and rising competition. However, the research house said it was surprised by the slump in contributions from its Singapore and Australian motor divisions.
Industrial earnings undershot due to weaker new equipment sales as mining companies deferred their projects due to the low coal prices.
On the outlook for the conglomerate, CIMB Research said the group unveiled its FY14 key performance indicators (KPIs) of 10 per cent returns on equity and RM2.8bil net profit, which was 16 per cent lower than last year's core net profit of RM3.34bil and 17 per cent below its previous forecast of RM3.4bil.
"We suspect that the variance was due to the group's more conservative earnings projections for its motor and industrial earnings," it said.
It added that Sime indicated that it is keen to list its Indonesian plantation arm in Jakarta at the right time and is reviewing possible structures.
Sime also expects a strong recovery in production and CPO prices to hover at RM2,600 to RM2,800 per tonne in the next six months.