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There wouldn't be many who think Sime Darby Plantation Berhad's (KLSE:SIMEPLT) price-to-earnings (or "P/E") ratio of 12.8x is worth a mention when the median P/E in Malaysia is similar at about 13x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Recent times have been advantageous for Sime Darby Plantation Berhad as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.
Check out our latest analysis for Sime Darby Plantation Berhad
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Sime Darby Plantation Berhad.
Does Growth Match The P/E?
There's an inherent assumption that a company should be matching the market for P/E ratios like Sime Darby Plantation Berhad's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 24%. Pleasingly, EPS has also lifted 1,860% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to slump, contracting by 23% during the coming year according to the analysts following the company. With the market predicted to deliver 12% growth , that's a disappointing outcome.
With this information, we find it concerning that Sime Darby Plantation Berhad is trading at a fairly similar P/E to the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.
The Bottom Line On Sime Darby Plantation Berhad's P/E
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Sime Darby Plantation Berhad currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.