Investment Highlights

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

• 1QFY19 core net profit of RM192mil was broadly in line with expectations, meeting 22% of our FY projection and 20% of consensus. Key exceptional items (EI) this quarter comprise a RM78mil gain from the disposal of Weifang Water and the RM35mil impairment on its stake in E&O.

• Core net profit grew 57%YoY as gains in the industrial segment outweighed a declines for the motors and logistics segments.

• Industrial continues to enjoy the strong demand for equipment in Australia, which saw a strong rebound for its mining sector from last year. The 15% topline growth in Australia made up for singledigit growth in Malaysia/SEA and a small drop in China.

• This continues to be the biggest driver for the group’s earnings and we expect the industrial segment to see double-digit growth for another two years. Management guided that the rebound in Australia could see a second and third wave in the longer term, fuelled by the replacement of existing equipment and purchase of new ones for the expansion into new mines respectively.

• The segment could benefit from higher activities from the O&G sector in Southeast Asia and construction in China, although it remains to be seen whether these will materialize in a way that affects earnings significantly.

• Motors, the group’s other key segment, saw core PBIT fall 23% YoY on sector-wide heavy discounting in China (where PBIT margin fell 1ppt to 1.1%). This overshadowed the higher sales in Malaysia (volume up 21% YoY) afforded by the tax holiday. Management highlighted that margins have started to slowly recover but consumption in China may still be held back as the final impact of trade tensions remains unclear.

• We see no major catalysts for its motors and logistics segments. The group still has some housekeeping to do following the demerger last year and said it intends to divest at least one noncore asset within this financial year. Apart from this, the group reiterated that its low gearing (0.08x) allows for fundraising should this be necessary.

• We reiterate that scaling up remains its only path to growth as an automotive retailer. Sime had its eyes on expanding in China but we reckon the conditions there remain unattractive for M&A at this time.

Source: AmInvest Research - 22 Nov 2018