Investment Highlights

• We are upgrading Sime Darby to BUY from HOLD with an unchanged SOP-based FV of RM2.64/share, pegging an FY21F PE of 11x to its motor segment. Although there is no upward revision in our earnings estimates, we are now recommending a BUY as we think that the stock’s valuation is undemanding at current levels.

• Sime Darby’s 1HFY20 core net profit of RM560.0mil accounted for 59% and 58% of our and consensus forecasts respectively and we deem this in line as we expect a weaker 2HFY20 due to uncertainties caused by the Covid-19 outbreak. As the China region is a major part of the group’s operations, we are taking a conservative stance on the group’s performance for 2HFY20. However, the impact cannot be accurately estimated and is heavily dependent on when the outbreak would be contained. Note that our valuation is based on FY21F.

• Sime Darby’s motor segment recorded a 1HFY20 top line of RM11.6bil (+3% YoY) due to higher vehicle car sales from BMW China and revenue contributions from the recently acquired three luxury dealership business from Inchcape in September 2019. Overall, the motor division recorded a 1HFY20 core PBIT of RM277.0mil (+23% YoY), largely supported by an impressive improvement in PBIT margins in the group’s China market to 2.9% from 1.4%. The group guided that the lower discounting in the China region has eased, which has contributed to margin recovery in the region.

• Sime Darby’s industrial segment posted an impressive 1HFY20 PBIT of RM556.0mil (+60% YoY) attributed to improved PBIT contributions from all regions. Notably, Australasia and China registered compelling core PBIT of RM389.0mil (+67% YoY) and RM112.0mil (+40% YoY) respectively. This can be attributed to higher Caterpillar equipment deliveries to the mining and construction sectors in Australasia and improved equipment sales in China. Australasia’s Industrial 1HFY20 PBIT margins continued to improve to 7.9% compared to 5.6% in 1HFY19. We think that this was due to the group’s efforts in expanding on its aftersales services of Caterpillar equipment which provides more lucrative profit margins.

• We note that the group’s industrial order book is at a multiyear high of RM2.9bil, where the major bulk (69%) of it comes from the Australasia region.

• The company guided that it will continue to be challenging to dispose of its logistics segment – 4 city ports in Weifang and Jining in China due to political reasons. The group will continue its efforts to monetize its 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 Feb 2020