SIME (4197) - Sime Darby Demerger - an analysis


On Thursday, Sime Darby's plantation and property units were listed on Bursa as part of their demerger process. The plan for the split were generally well received as investors were looking forward to investing directly in the specific industry that they want to (i.e. plantation pure play or property pure play). The split would also ensure that there will be no cross-subsidisation.
However, on Thursday, the two units debuted on Bursa rather poorly. From our analysis, this is down to poor setting of reference price coupled with investor irrationality. Let's analyse below:
Reference price        
  Price Proportion Dividend Dividend Yield
Sime Darby 1.85 20.7% 0.17 9.2%
Sime Darby Plantation 5.59 62.5%    
Sime Darby Property 1.5 16.8%    
Opening price        
  Price Proportion Dividend Dividend Yield
Sime Darby 2.4 25.8% 0.17 7.1%
Sime Darby Plantation 5.6 60.2%    
Sime Darby Property 1.3 14.0%    
Closing price        
  Price Proportion Dividend Dividend Yield
Sime Darby 2.35 27.5% 0.17 7.2%
Sime Darby Plantation 5.01 58.5%    
Sime Darby Property 1.2 14.0%    
  1. The listing exercise is via a dividend-in-specie process. For the layman out there, what this means is from owning 1 share worth RM8.94, you will now own 3 shares worth RM1.85, RM5.59 and RM1.50 (adding up to RM8.94). The reference price exercise is akin to splitting a pie worth RM8.94 to 3 parts.. As the exercise is an exercise of splitting a pie, we need to analyse the performance of the listing by looking at the entire pie and not just the performance of the individual shares (as a shareholder of Sime before Thursday would own all 3 shares).
  2. Reference price - As you can see in the first table, the proportion of Sime Darby Plantation is the biggest, followed by Sime Darby and Sime Darby Property. However, Sime Darby would have dividends of RM0.17. Based on the reference price of RM1.85, it is obvious that the dividend yield is extremely high (at a whopping 9.2%!). IMO, the pie should be split more to SIme Darby, especially given that only SIme Darby would have the dividends of RM0.17.
  3. Opening price - As we can see straight after the opening bell, there was a redistribution of value from Sime Darby Plantation and Sime Darby Property to Sime Darby. It would seem that the market is pricing Sime Darby at a dividend yield of 7% which is much more reasonable compared to the reference price. This to me is the rationale distribution of value.
  4. Closing Price - What follows would be investor irrationality as the plunge in the Property price led to panic selling while Sime Darby Plantation was also sold down as investors tend to suffer from FOMO (Fear of Missing Out) to buy into Sime Darby, after it's significant increase in value and ofcourse dividends. 
  5. Take Away - We personally think that the market has been irrationale in its sell-down, beyond the redistribution of value among the 3 counters. The fundamentals of Sime Darby as a whole pie have not changed. Hence, the total value of the 3 counters should not fall to RM8.56 from RM8.95. The total should add up to no less than RM8.95 (before ex-dividend date). Hence, there should be positive movements in totality. The question would be which counter would increase to ensure that the whole pie gets back up to RM8.95?
  6. What happens next - Sime Darby will go ex-dividend on Monday, hence its price will adjust accordingly. Once it goes ex, we expect that the shareholders will be less inclined to hold Sime Darby shares and would move their holdings to either SD Property or SD Plantation. Our best guess is that most of it will go to SD Plantation due to the more favourable industry environment compared to Property. In addition, SD Plantation is in the KLCI and is considered a blue chip and a safer investment. Given it's 50% dividend policy, investors can also expect a good dividend in the coming year. Coupled with positive movements in palm oil futures last week, the stars could be aligned to Sime Darby Plantation ( What will really happen on Monday, only time will tell.
Free feel to comment on this and let's have a healthy discussion on what will happen to these counters next week.
Disclaimer: The above is an analysis of the demerger exercise and is in no way a buy or sell recommendation on any counters. Please do your own research before making any investments.