Investment Highlights

• We maintain HOLD on Sime Darby with a lower SOP-based FV of RM2.33/share (from RM2.42) and a PE of 12x for its motors segment. We trim our FY19-21 projections by 4-7% after cutting margin assumptions for the key markets in the motor business.

• While the prospects for the industrial segment serve as a strong foundation for the group (with an order book of RM2.5bil), we do not see any compelling growth story.

• For 2QFY19, core net profit fell 24% to RM168mil despite a 7% improvement in revenue. Rising momentum from the industrial segment was pulled back by slower core earnings of the motor segment.

• The latter continued to struggle with poor margins in China on sector-wide heavy discounting. Both sales and margins there improved slightly but remained significantly below their historical levels.

• For 1HFY19, core net profit improved 12% YoY while revenue rose 8% YoY. The group continued to lean heavily on its industrial segment as the motors business struggles, particularly in China. The two segments make up 94% of the group’s core PBIT while the other business operations are too marginal to cushion any major decline in either of the two key ones.

• Zooming in into the motors segment, China and Malaysia made up over two-thirds of PBIT. Sales in both markets improved in 1HFY19 (China up 19%, Malaysia up 8%) but the changing landscape in China has trimmed margins there by 1.2ppt to 1.4% from an already razor-thin 2.6% in the previous year.

• Earnings from China fell 38%YoY. To better illustrate the severity of the situation: Sime earned roughly an equal amount from China and Malaysia, despite selling over twice the amount in the former.

• The group hopes to reap better margins from several key launches aimed at its core markets, primarily updates on the BMW X5, 3 series and 5 series (the three form over a third of Sime’s BMW sales in China). Margins there are crawling up but consumption in China may still be held back as the final impact of trade tensions remains unclear.

• We see no major catalysts to drive Sime apart from the continued strength in the industrials segment. It still has some housekeeping to do following the demerger in end-2017 and resolved to identify non-core assets for this purpose within the next 3-5 years.

Source: AmInvest Research - 22 Feb 2019