• Sime Darby announced that Sime Darby Industrial Holdings Sdn Bhd, a whollyowned subsidiary of Sime Darby, has completed the disposal of its 53.0% equity interest in Sime Kubota Sdn Bhd (SKSB) to Kubota Corporation for a total cash consideration of RM25.9mil. Following the disposal, SKSB will cease to be an indirect wholly-owned subsidiary of Sime Darby. This will reduce its shareholding in SKSB from 93% to 40%, consequently turning it into an associate company of Sime Darby.

• Sime Kubota is principally engaged in the distribution of a wide range of light equipment and related spares for use in the agricultural, construction and industrial sectors.

• In addition to agricultural equipment, Kubota also produces a diverse portfolio of other products including city-wide water filtration systems, irrigation, piping, roofing, housing and large underground valves.

• We believe that the disposal will not affect the group’s earnings significantly as management has guided that SKSB only accounted for less than 5% of the topline contribution for the industrial segment’s revenue and less than 2% of the group’s PBT. For the industrial segment, 95% of its revenue is derived from the dealership business of Caterpillar equipment. Any one-off gains from this disposal are not expected to have any material impact on the group’s current net gearing ratio of 0.12x. We will not be factoring in one-off gains from this transaction to our estimates as our projection is based on core earnings.

• We are neutral on this news as we believe the group still has some housekeeping to do following the demerger in end-2017 and is resolved to identify non-core assets for this purpose within the next 3–5 years.

• We see no major catalysts to drive Sime Darby apart from the continued strength in the industrial segment. With that, we maintain HOLD on Sime Darby with an unchanged SOP-based FV of RM2.33/share and a PE of 12x for its motor segment.

Source: AmInvest Research - 3 Apr 2019