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3 Takeaways From Sime Darby
By: Peter Ng
Articles (81) Profile

Formerly known as Synergy Drive which was the result of a merger between three corporations in Malaysia, Sime Darby, Guthrie and Golden Hope, emerged the conglomerate, Sime Darby with five operating business segments across plantations, property, industrial, motors as well as energy and utilities.

Multitude Of Businesses

Under its plantation segment, the group is the one of the world’s largest producers of palm oil, producing five percent of the world’s annual supply of crude palm oil with operations in both upstream and downstream plantation activities. This segment is the flagship of Sime Darby where 46.2 percent of the group’s operating profit in FY13 was derived from the segment, as well as the largest contributor of profits within its business segments.

Next, the group leases and sells industrial equipment and vehicles under the Caterpillar brand from Caterpillar Incorporated, one of the world’s largest manufacturers of heavy equipment and industrial machineries, via its industrial segment.

Under the group’s motor segment, the company operates several lines of motor dealerships across eight countries. Notably, under the group’s subsidiary, Auto Bavaria, is a dealer of the BMW, MINI and Motorrad marque in Malaysia.

The other segments involve the development and renting of properties, supplying equipment for oil and gas companies to undertake exploration activities, utilities in the form of generating power as well as the retail of consumer products through its investment in Tesco hypermarkets in Malaysia.

Operating Margin Of Sime Darby’s Operating Segments In FY14

Source: Company Annual Report

 

The Case Of A Conglomerate Discount

In most conglomerates, a conglomerate discount is likely to exist. This discount basically denotes a discount to the valuations of the conglomerate compared to valuing each of its operating segments separately.

There are a host of reasons arising from debates ascribed towards the existence of a conglomerate discount, but the most credible reason is more likely that the diversification of a conglomerate’s underlying businesses do not create synergies for one another.

The result would lead to a haircut on valuations and eventually a conglomerate discount would be registered.

Let’s find out whether how much or is there a conglomerate discount for Sime Darby through a brief valuation exercise for each of its operating segments.

Sum Of The Parts Analysis

By separately valuing the underlying operating segments of a conglomerate, followed by summing these individual segments, is deemed as a sum of the parts analysis.

This is the technique which will be employed in our mini exercise of valuing Sime Darby.

First stop, since all of the operating segments under Sime Darby are earnings positive, we will use the relevant enterprise value (EV) to earnings before interest, depreciation, amortisation and taxation (EBITDA) ratios of an industry which the operating segment falls under to estimate their valuations.

SOTP Valuations Of Sime Darby

Source: FactSet And 2014 Company Annual Report

All amounts except EV/EBITDA and Price are in millions of RM. Figures are based on 14 April 2015.

At an estimated price of RM9.04, Sime Darby appears to be fairly valued.

Unlike most other conglomerates there are no discounts present within its valuations and is likely a vote of confidence on the efficiency of its operations.

All Instead Of One

In summary, looking into a conglomerate is no simple feat since most of them run more than one operations. As such, potential investors should look into them as though they are separate entities. Given that, most of their operations may not be synergistic with one another are reasons to fuel independent analyses of each business segment.

Backed by a strong interest in investments, Peter's research spans across a range of industries, with his focus placed on companies listed on the SGX.

Please click here for more information about this author.


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