Investment Highlights

• We maintain our HOLD call on Sime Darby and an unchanged SOP-based FV of RM2.64/share with an FY21F PE of 11x for its motor segment.

• Sime Darby’s 1Q20 core net profit of RM270.0mil was in line with our expectations, accounting for 28% of our and 28% of consensus forecasts respectively. Core earnings improved significantly by 43% YoY, backed by a 7% revenue growth.

• Sime Darby’s motor segment recorded a 1Q20 top line of RM5.4bil (-2% YoY) mainly due to lower sales volume from BMW Malaysia. This was due to a high-base effect from 2018’s tax holidays in the same corresponding quarter last financial year where the group sold a total of 5.1K units in 1Q19 compared to 3.5K units in 1Q20 (-30% YoY). Overall, the motor division recorded a core PBIT of RM134.0mil (+28% YoY), supported by better-than-expected PBIT margins in the China market at 2.9% from 1.1%. This has surpassed our expectations as we expected sales to be sluggish due to the Hong Kong protests. Nevertheless, the region’s sales volume held up well at 10.8K (+8% YoY). We think that the division’s improved profitability was highly attributed to lower discounting and higher margin contributions from new vehicle sales of the BMW 3 and 5- series. The group said it is looking to acquire more BMW car dealerships in China to increase its footprint.

• Sime Darby’s industrial segment registered a remarkable 1Q20 PBIT of RM260.0mil (+41% YoY) backed by improved PBIT contributions from Australasia and China of RM192.0mil (+40% YoY) and RM42.0mil (+20% YoY) respectively. This can be credited to higher Caterpillar equipment deliveries to the mining sector in Australasia and the construction sector in China. Australasia’s industrial 1Q20 PBIT margins continued to improve to 7.8% compared to 6.9% in 1Q19. We believe this was due to the group’s efforts to expand its after-sales services of Caterpillar equipment which provided higher profit margins, as parts and services typically yield better margins compared to sales of the industrial equipment.

• The group’s balance sheet for the quarter remained sturdy, with a marginal increase in net gearing ratio to 0.11x in 1Q20 from 0.06x in 1Q19 following its acquisition of the Caterpillar dealership Gough Group in New Zealand, and an increase in short-term borrowings for additional working capital.

• Management said it will continue to be challenging to dispose of its logistics segment – 4 city ports in Weifang and Jining – due to political reasons. We hope the group will continue its efforts to monetize other non-core assets, i.e. Lockton Insurance, a 30% stake in Tesco Malaysia and its 11.6% stake in E&O.

Source: AmInvest Research - 27 Nov 2019