Investment Highlights

• We maintain HOLD on Sime Darby with an SOP-based FV of RM2.42/share and a PE of 12x for its motors segment.

• The group announced on Tuesday it would acquire Australia’s Heavy Maintenance Group (HMG) for A$58mil or RM172mil. Our comments below:

1) The impact to gearing will be minimal. The addition of RM172mil in debt — the purchase will be funded entirely with external borrowings — would increase the gearing to 0.1x from 0.08x as of end-June.

2) Earnings improvement will be marginal. HMG will be absorbed into Sime Darby Industrial Australia (SDIA), which leads the group’s mining services in Australia. HMG’s net profit for its last financial year would make up less than 2% of Sime’s net profit in FY18.

3) Valuation is fair. The purchase price implies a historical PE of 14.5x, which is in the mid-range of the 9–27x PE seen for miningrelated companies in Australia.

4) There should be no major roadblock for the deal. Sime expects to conclude it by end-2018 and will require approval from Australia’s Foreign Investment Review Board. The target company (HMG) is 92% owned by one party (a private equity fund) and the rest is held by minority shareholders.

• While we are neutral on the move given its minor impact, we are positive that Sime is beefing up its operations where it matters. The industrial segment offers the best prospects for Sime given that it is a proxy to the rebound in Australia’s mining sector.

• The Australian market dominated the earnings from the industrial segment, accounting for 48% of its PBIT and 55% of its revenue. Sime’s mining services there (via SDIA) account for 60% of the segment’s revenue in Australia, while the remainder is derived from the sales of Caterpillar heavy equipment.

• HMG would provide Sime presence in a new part of the value chain for mining services. HMG is engaged in the manufacture, refurbishment and surface finishing of hydraulic cylinders used in heavy industries such as mining and O&G. SDIA only services similar equipment.

• Earnings going forward look to be driven by the continuing uptick in Australia’s mining sector. We do not see any major catalysts for its motors and logistics segments.

Source: AmInvest Research - 31 Oct 2018