Investment Highlights

• We maintain our HOLD call on Sime Darby but increase our FV to RM2.38 (from RM2.33) based on a rolled over FY20F PE of 12x for its motor segment.

• We reduce Sime Darby’s FY19–20 core net profit forecast by 7.8–7.2%. This is to account for lower revenue growth and margin assumptions. We are assuming a revenue growth of 1–2% for Sime’s China motor segment for FY19– 20 compared with our previous assumption of 3–4%. Our new FY19–20 PBIT margin assumption for China’s motor segment is 1.5–1.8% from 3–2.4% previously.

• Key points from our meeting with the group’s management recently:

1. Slowdown in sales and low margins for motor segment expected to persist. Following the cut in import tariffs to 15% from 25% in China July last year, BMW dealerships in the region have offered their vehicle prices at heavily discounted prices in order to stay competitive against other lower priced imported cars. The group guided that the heavy discounting will continue in the near term as the group’s priority is to preserve market share rather than profitability. With that, we believe the group’s motor segment will remain sluggish in the near term due to slowdown in sales and margin erosions from China, where we estimate net margins for the motor segment to continue hovering at the 1–2% level for the region, till FY20F. However, we think both sales and margins should normalize in the longer term when the heavy discounting subsides.

2. Outlook for the industrial segment, currently riding on the mining boom, is expected to remain stable. The group guided for a stable outlook for the industrial segment (Caterpillar equipment), a view we share. Assuming that share prices of global mining giants Rio Tinto and BHP Billiton reflect the market’s expectations of the outlook for the global mining sector (Exhibits 4 & 5), it appears that the sector is currently only in its third year of expansion since mid-2016 (vs. the last trough cycle that lasted for five years between 2011 and 2016). Therefore, we retain our projection of 15% growth for FY20–21 for the industrial segment in Australasia.

• We remain neutral on Sime Darby. While we are still concerned about the group’s motor segment in the near term, we believe that the industrial segment will stay as the group’s backbone for the foreseeable future. We look forward to the group’s plans on expanding the healthcare segment organically on rising affluence and an aging population. The group still has some housekeeping to do following the demerger in end-2017 and has resolved to identify non-core assets within the next 3 to 5 years.

Source: AmInvest Research - 16 Apr 2019