Investment Highlights

• We maintain our BUY recommendation on Sime Darby with an unchanged SOP-based FV of RM2.21/share, pegged to FY21F PE of 7x to its motor segment.

• Sime Darby’s 9MFY20 core net profit of RM717.0mil was in line with our expectations, accounting for 79% of ours and 78% of consensus forecasts respectively. 9MFY20 core earnings improved a significant 13% YoY, backed by a 5% revenue growth.

• Sime Darby’s motor segment recorded a slightly higher 9MFY20 top line of RM16.2bil (+0.5% YoY) due to higher vehicle car sales from the Australia region, attributed to contributions from the recently acquired three luxury dealership business from Inchcape in September 2019. Overall, the motor division registered a 9MFY20 core PBIT of RM380.0mil (+13% YoY), largely supported by an impressive improvement in PBIT margins in the group’s China market to 2.7% from 1.6%. The group said that the competitive discounting in the China region has subsided, hence contributed to the margin recovery in the region.

• Sime Darby’s industrial segment posted an impressive 9MFY20 PBIT of RM774.0mil (+26% YoY) on improved PBIT contributions from 3 core regions – Australia, Malaysia and Southeast Asia. We understand that the mining sector is considered an essential industry in Australia. Activities for mining were not halted by the Covid-19 lockdown. Notably, the Australasia’s industrial segment registered a compelling 9MFY20 core PBIT of RM571.0mil (+35% YoY) and this can be attributed to higher Caterpillar equipment deliveries to the mining and construction sectors in Australasia. On the other hand, China’s Industrial segment recorded a slightly lower 9MFY20 core PBIT of RM129.0mil (-4% YoY) and we believe that this was due to the extended Lunar New Year holidays in the region.

• Australasia’s Industrial 9MFY20 PBIT margins continued to improve to 7.6% compared to 6.8% in 9MFY19. This was likely to have been contributed by the group’s efforts in expanding its after-sales services of Caterpillar equipment which provides more lucrative profit margins compared to just sales and distribution of heavy equipment.

• Sime Darby’s industrial order book remains healthy at RM2.4bil, where the major bulk (68%) of it comes from the Australasia region.

• We are slightly wary about the declining metallurgical coal prices, which our records showed has averaged at US$155/MT for 9MFY20, 24% lower compared to US$205/MT in 9MFY19. It last traded at US$119/MT. Note that the miner’s breakeven point is at US$80/MT as per previously guided during a meeting with the group.

Source: AmInvest Research - 22 May 2020