Investment Highlights

• We maintain our BUY call on Sime Darby with an unchanged SOP-based FV of RM2.56/share with an FY20F PE of 12x for its motor segment.

• Sime Darby’s FY19 core net profit of RM950.0mil was in line with our expectations, accounting for 95% and 100% of our and consensus forecasts respectively. On a cumulative basis, core earnings improved significantly by 14% YoY supported by a 7% revenue growth and higher profitability margins on all levels for the group.

• Sime Darby’s motor segment recorded an FY19 top line of RM21.6bil (+6% YoY) due to better performance from China and Malaysia. China and Malaysia registered higher sales volume of 22% and 2%, which resulted in a 20% and 10% increase in revenue from their respective markets. However, we witnessed a margin erosion (-0.3ppt) on the PBIT level to 2.3% in China due to a prolonged heavy discounting of vehicles in the region and we believe this will continue as a result of the ongoing trade war. Overall core PBIT for the motor segment fell 11.0%YoY to RM616mil in FY19.

• Sime Darby’s industrial segment registered an FY19 PBIT of a whopping RM817.0mil (+88% YoY) backed by strong deliveries of Caterpillar equipment in Australiasia (+18% YoY). This was due to the growth in the mining industry in the Asia Pacific region propelling demand for both mining equipment replacement cycles and expansions. We also note an impressive core PBIT margin improvement from Australasia to 6.4% from 2.9%, leading to a 161% YoY improvement in PBIT for the region. The improvement was attributed to the group expanding on its after-sales services of Caterpillar equipment which have provided higher profit margins. We expect this to be sustainable going forward.

• The group’s industrial equipment order book remained healthy at RM2.4bil in 4Q19, where 63% of the demand coming from Australasia.

• The group improved its balance sheet for the quarter, reducing its net gearing ratio to 0.06x from 0.13x, attributed to lower short-term borrowings.

• The group declared dividends of 8 sen for the quarter, cumulating to 10 sen for FY19. This translated into a fair dividend yield of 4.7%.

• However, we remain cautious on Sime Darby overall 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 - 28 Aug 2019