Investment Highlights

• We are upgrading Sime Darby to BUY from HOLD with a lower SOP-based FV of RM2.56/share from RM2.57/share with a PE of 12x for its motor segment. The stock’s valuation is undemanding at current levels. Hence, we are now recommending a BUY on weakness of the share price.

• We increase Sime Darby’s FY20–21 core net profit by 1.3%– 1.4% to account for the accretive earnings to the group’s industrial segment from the acquisition of Gough Group Limited while factoring in the additional finance cost required to fund the acquisition.

• Sime Darby announced that its indirect wholly-owned subsidiary Sime Darby (NZ) Holdings Limited has entered into a conditional sale and purchase agreement with privatelyowned Gough Holdings Limited to fully acquire the latter for a gross consideration of NZ$211.0mil or RM572.0mil. The group said the acquisition will be funded by bank borrowings.

• The Gough Group has a Caterpillar dealership with service territory in New Zealand and interests in the transport and materials handling business in New Zealand and Australia. The Gough Group has a revenue of NZ$540mil (approximately RM1.46bil) in 2018. Assuming a flat growth for FY19–20 and a 2% PBT margin going forward in the industrial dealership business in the Oceania region, the Gough Group could register a PBT of circa NZ$10.8mil (RM29.2mil).

• The acquisition of the Gough Group was in line with Sime Darby’s strategy to expand its Caterpillar dealership business to other regions such as New Zealand. It is rare for a Caterpillar dealership business to be up for sale, and Sime Darby has decided to take this opportunity to gain exposure to the construction and forestry sectors in New Zealand, and enhance its relationship with Caterpillar. This will also further reinforce Sime Darby Industrial’s footprint in the Asia Pacific region.

• We are mildly positive on this announcement as it gives Sime Darby a foothold in a new region, and it strategically aligns with the group’s vision to further grow its industrial segment in the Asia Pacific region at the expense of additional borrowings. We expect the industrial division to continue supporting the group’s earnings as miners have increased their expenditures for equipment replacements as well as for expansions in Australia.

• Nevertheless, 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.

Source: AmInvest Research - 14 Aug 2019