Investment Highlights

• We maintain our BUY recommendation on Sime Darby with an unchanged SOP-based fair value of RM2.40/share, pegged to an FY21F PE of 8x to its motor segment.

• Sime Darby registered a record high core net profit of RM1,040mil in FY20, which is above our expectations, accounting for 115% of ours and 112% of consensus full-year forecasts respectively. However, we are leaving our FY21–22F estimates unchanged as we remain cautiously optimistic on Sime’s outlook amidst the pandemic, especially the motor division in Singapore and the Australasia region, which are still under lockdowns.

• Sime Darby’s motor segment posted a slightly lower FY20 top line of RM20.9bil (-3% YoY) due to lower vehicle sales from Singapore and Malaysia, affected by the circuit breaker and MCO measures due to the Covid-19 outbreak in 2HFY20. Overall, the motor division registered a FY20 core PBIT of RM600.0mil (-3% YoY). We witnessed an improvement in PBIT margins in the group’s China market to 2.7% from 2.3% as the competitive discounting in China has subsided, hence contributing to the margin recovery.

• Sime Darby’s industrial segment posted an impressive FY20 PBIT of RM1,007.0mil (+23% YoY) on improved PBIT contributions from 3 regions – Australia, China and Southeast Asia. We gather that the mining sector is considered an essential industry in Australia and hence, mining activities were not disrupted by the Covid-19 lockdown. Notably, the Australasia’s industrial segment registered a compelling FY20 core PBIT of RM717.0mil (+32% YoY) and this can be attributed to higher Caterpillar equipment deliveries to the mining and construction sectors in Australasia. China’s Industrial segment also recorded a strong FY20 core PBIT of RM212.0mil (+13% YoY), attributed to higher profits due to higher equipment sales and product support throughout the year.

• Australasia’s Industrial FY20 PBIT margins continued to improve to 7.2% compared to 6.4% in FY19. This was likely to have been contributed by the group’s efforts in expanding its after-sales services of Caterpillar equipment which provide more lucrative profit margins compared to just sales and distribution of heavy equipment.

• Sime Darby’s industrial order book remained healthy at RM2.2bil, mainly from Australia (63%).

• Metallurgical coal prices have averaged at US$144/MT for FY20, 28% lower compared to US$201/MT in FY19. 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 - 28 Aug 2020