Investment Highlights

• We maintain our HOLD call on Sime Darby but increase our SOP-based FV to RM2.57/share from RM2.38/share with a PE of 12x for its motor segment. We increased Sime Darby’s FY19–20 core net profit forecast by 20–14%. This is to account for higher PBIT margin assumptions of 4.5%/4.0% (previously: 2.5%/2.5%) for Sime’s Australia’s industrial segment for FY19-20.

• Sime Darby’s 9M19 core net profit of RM647.0mil exceeded our expectations but was within with street estimates, accounting for 86% and 73% of our and consensus forecasts respectively. On a cumulative basis, core earnings improved significantly by 26% YoY supported by a 6% revenue growth and higher profitability margin for the group.

• Sime Darby’s motor segment recorded a 9M19 topline of RM16.1bil (+5% YoY) due to better performance from China and Malaysia respectively. China and Malaysia registered 22% and 4% more sales volume, which resulted in a 16% and 11% increase in revenue from their respective markets. However, we witnessed a margin erosion (-1.2ppts) on the PBIT level to 1.6% in China due to heavy discounting of vehicles in the region. The group also guided that the lower contribution from Singapore was due to lower sales volume from the region (-10% YoY). Cumulatively, the group’s core PBIT for the motor segment fell to RM336.0mil (-18% YoY).

• On the other hand, Sime Darby’s industrial segment registered a 9M19 revenue of RM10.3bil (+9% YoY) backed by strong deliveries of Caterpillar equipment in Australasia (+16% YoY). This was due to the upturn of the Australian mining industry. We also note an impressive core PBIT margin improvement from Australasia of 3.8ppts to 6.8%, leading to a 163% YoY improvement in PBIT for the region. The group’s industrial equipment order book was a healthy RM2.6bil at the end of the quarter, where 64% of the demand came from Australasia. The group guided that the industrial segment will continue to improve as miners increased their expenditures for equipment replacements as well as for expansions in Australia.

• Sime Darby’s logistics and healthcare segments remained low contributors to the group’s earnings, where each segment contributed only a mere 4% to the group’s core PBIT. The logistics and healthcare segment achieved a core PBIT of RM37.0mil (-39% YoY) and RM42.0mil (-2% YoY) respectively.

• Overall, we remain cautious on Sime Darby amidst the increased tension from the US-China trade war which may directly impact the group’s motor division. We are also closely monitoring coal prices as a bearish outlook could dampen the demand for the group’s industrial equipment on a global scale.

Source: AmInvest Research - 30 May 2019