New Britain deal 'could herald Sime Darby split'

A Sime Darby purchase of control of New Britain Palm Oil could herald the a long-mulled hive-off of the conglomerate's plantations division, TA Securities said, as brokers reacted to news of talks over acquiring Kulim's stake.

Sime Darby, the Malaysia-based property-to-automobiles group, revealed on Thursday that it entered into exclusive talks over purchasing Kulim's 49% stake in New Britain Palm Oil, the Papua New Guinea-based palm oil producer.

Success in a deal - which also reportedly attracted interest from Felda Global Ventures and Singapore's Wilmar International may increase the appeal of Sime Darby separating off the plantations division.

That  could create value for shareholders by eliminating the discount at which its shares trade to the level sum-of-the parts valuation suggest, and potentially raise money for further investment.

Spin-off possibilities

"A potential deal will further boost the idea of spinning off the plantation assets into a separate listed unit," Singapore-based TA Securities said, restating a "buy" recommendation on Sime Darby shares, with a price target of 10.70 ringgit, based on a sum-of-the parts valuation.

Sime Darby chief executive Mohd Bakke Saleh in December revealed that the group was considering a plantations spin-off in December, telling investors that "we are exploring the option and avenue of expanding the business by either merging with the existing businesses or just going to the market, do an initial public offering and unlock value, and use the proceeds to expand further".

However, more recent speculation has centred on the Malaysia-based group hiving off its motor division, raising some $500m.

Indeed, some investors believe Sime Darby may become a pure-play plantations group, shedding assets which also include energy and industrial arms.

'Avenues for earnings enhancement'

Sime Darby has 60 days for exclusive talks with Kulim over finalising a purchase which, at the 517.6p at which New Britain Palm Oil shares were trading at on Friday, would value Kulim's stake at some £380m (2.0bn ringgit).

"For Sime, funding an acquisition of about 2bn ringgit is not an issue as the core businesses are profitable and the group is sitting on a cash reserve of 4.2bn ringgit as at March 31," Affin Investment Bank analyst Ong Keng Wee said, restating an "add" rating on Sime Darby shars, with a price target of 10.52 ringgit.

And the deal would give "avenues for earnings enhancement through operational synergies provided Sime have full management and control over New Britain Palm Oil".

However, there are potential hurdles to a deal, with Papua New Guinea stock exchange rules requiring that a buyer of a 20% stake in a listed company receive consent from other shareholders in the target group, or to open its offer to all investors.

Kulim last year fell foul of Papua New Guinea regulations in an attempt to purchase a further 20% of New Britain Palm Oil, of which the West New Britain Provincial Government is the second largest shareholder.

What price?

There is also some speculation over what price Sime Darby would need to pay to secure the stake.

Kulim offered 550p a share in last year's attempt to raise its stake, but a review by BDO, commissioned by New Britain Palm Oil, estimated fair value at 650p-700p.

At London broker VSA Capital, Edward Hugo said: "It would be surprising if it was below 550p, given that was the price Kulim tried to acquire more of the business for last year.

"Press rumours have suggested a price of 600p might be more likely."

Sime Darby shares closed up 0.5% at 9.55 ringgit on Friday in Kuala Lumpur, where Kulim stock ended 3.7% higher at 3.38 ringgit.

New Britain shares have been little changed by the announcement, a factor reflecting uncertainty of a Sime deal, and their rise of 50% already over the past six months, fuelled by rumours of a Kulim sale.

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