Investment Highlights

• We are downgrading Sime Darby to HOLD from BUY with an increased SOP-based FV of RM2.64/share based on a rolledover FY21F valuations for all of the group’s segments. We reduce the group’s motor segment PE multiple to 11x from 12x due to the escalating US-China trade war tension which will impact its China motor operations.

• Sime Darby’s share price has risen 9% since our upgrade on 14 August 2019, and we strongly believe that our downgrade is justified as the current share price’s upside is limited.

• We marginally lower our core net profit forecasts for FY20–22 by 0.6%/0.5%/0.5% respectively on the following assumptions: 1) increased interest expense from additional borrowings to fund the acquisition of three Australian luxury car dealerships; and 2) earnings contribution from the said acquisition (which will be further explained below).

• Sime Darby recently announced that its wholly-owned subsidiary, Sime Darby Motors (SD Motors) has acquired the business assets, liabilities and properties of three luxury car dealerships in Sydney, Australia from Inchcape Australia Ltd’s automotive retail unit Trivett for A$112mil (approximately RM321mil). The three dealerships represent the BMW, MINI, Volkswagen, Jaguar and Land Rover marques.

• The proposed acquisition is expected to be completed by December 2019. Based on our short conversation with Sime Darby’s management, the acquisition is to expand the group’s foothold in Australia and is in line with its strategy of expanding in the Australian retail luxury segment. This is expected to strengthen Sime Darby’s presence and brand visibility in Parramatta, which is one of Sydney’s most recognized automotive retail locations.

• The acquisition will be funded by external borrowings. Assuming Sime Darby borrows from an Australian bank at an annual 6% finance cost, the yearly interest repayment will be about A$6.7mil, which is approximately RM19.3mil. Based on our back-of-the envelope estimates, the acquisition will contribute about A$4mil (RM12.0 mil) to the group’s PBT level. We have incorporated the changes to our forward estimates. The additional borrowings will increase the group’s net gearing from 0.06x to 0.08x, which is still healthy.

• Sime Darby is also looking to rationalize its non-core assets, including its logistics and ports division and its 11.6% stake in Eastern & Oriental Bhd (a Bursa-listed company in the property sector). Overall, earnings for the group’s motor segment will remain unexciting in the near term, and we believe that the industrial segment will stay as the group’s backbone to drive its revenue ahead.

Source: AmInvest Research - 12 Sept 2019