Investment Highlights

• We maintain our HOLD recommendation on Sime Darby with an unchanged SOP-based FV of RM2.64/share based on a FY21F PE of 11x for its motor segment. The share price is seen as fairly valued at current levels with limited upside.
• Key points from our meeting with Sime’s management:
  
  1) Extremely depressed vehicle sales in Hong Kong. We gather that the ongoing protest against the local government in Hong Kong which started in end-March has disrupted Sime Darby’s vehicle sales. However, the shortfall from Hong Kong’s sales is expected to be mitigated by the improved transactions in the China region earlier this year from the launch of the new BMW 3-and 5-series. With that, we expect the overall total vehicle sales in the region for FY20 to be flattish. Going forward in FY20F, we still expect Sime’s China automotive division to remain sluggish as margins will continue to erode due to the prolonged heavy discounting given by BMW vehicles in order to remain competitive in the region due to the ongoing trade tensions. In FY19, the core PBIT contribution in China-HK region was at 38% while in Malaysia, it stood at 40% for the automotive segment.
  2) Metallurgical coal breakeven point at US$80/MT.
  ​​​​​​​Metallurgical coal prices have a clear correlation to the demand for equipment, parts and services for Sime’s industrial division. Even though there is a dip from its 2019 peak of US$195/MT in May to a recent low of US$148/MT, it is still well above the breakeven point at US$80/MT. With that said, we are expecting another compelling growth for the Australasia region in FY20F due to two main reasons: i) demand for both mining equipment replacements is still growing as the coking coal prices continue to remain above the breakeven point; and ii) Sime’s intention to continue expanding the services segment in heavy equipment as it provides better profitability margins for the group.
• After losing out on the Columbia Asia deal following a bid against the Hong Leong Group, Sime Darby is still looking to expand its healthcare segment. The group is aware of the pumped-up valuations of the healthcare industry if it chooses to expand via M&A. The group guided that it has allocated RM5 billion for expansion (of all segments) over the next 5 years.
• We look forward for Sime expanding its healthcare segment in tandem with the rising affluence in Malaysia. We also hope that the group will continue its efforts to monetize its noncore assets, i.e. Lockton Insurance, 30% stake in Tesco Malaysia, 11.6% stake in E&O and its logistics segment which consists of 4 major city ports in Weifang and Jining, China.

Source: AmInvest Research - 31 Oct 2019