Investment Highlights

• We maintain our BUY recommendation on Sime Darby with an unchanged SOP-based fair value of RM2.86/share, pegged to an FY22F PE of 9x for its motor segment. We make no changes to our FY21–23F earnings estimates.

• Sime Darby’s 1HFY21 core net profit of RM633.0mil (adjusted predominantly for a RM294.0mil gain on disposal of Tesco) came in within our expectations but marginally above consensus, accounting for 55% of our full-year forecast and 56% of full-year consensus estimates respectively. 1HFY21 core earnings was up 13% YoY.

• Sime Darby’s motor segment recorded a higher 1HFY21 top line of RM14.3bil (+24% YoY) due to stronger vehicle sales from both China (+27% YoY) and Malaysia (+30% YoY) – largely attributed to “revenge-spending” post-lockdown in the premium car segment for the former and SST exemption for the latter. Overall, the motor division registered an impressive 1HFY21 core PBIT of RM505.0mil (+82% YoY).

• Sime Darby’s industrial segment posted a lower 1HFY21 PBIT of RM454.0mil (-18% YoY) on weaker PBIT contributions from 3 regions – Australia, Malaysia and Southeast Asia. The Australasia’s industrial segment registered a lower FY20 core PBIT of RM305.0mil (-22% YoY) and this is attributed to lower Caterpillar equipment deliveries to the mining and construction sectors in Australasia. We note that the mining sector is considered an essential industry in Australia and hence, mining activities were not affected by the recent Covid- 19 lockdown in certain states throughout the nation.

• On the flipside, China’s Industrial segment recorded a significant increase in 1HFY21 revenue to RM2.4bil (+16% YoY), attributed to improved equipment sales following the rise in government infrastructure investment (pump priming to stimulate the economy post Covid-19 pandemic). However, the segment was hit by lower margins due to increased competition in the region, resulting in a flattish 1HFY21 PBIT of RM113.0mil (+1% YoY).

• Sime Darby’s industrial order book remained healthy at RM2.7bil (+18% QoQ), mainly from the Australasia region (70%).

• Metallurgical coal prices have averaged at US$117/MT for 1HFY21, 23% lower compared to US$151/MT in 1HFY20, as indicated in the weaker industrial equipment sales in Australasia. YTD FY21F (June), metallurgical coal prices have averaged at US$122/MT and it last traded at US$134. Note that the miner’s breakeven point is at US$80/MT as previously guided during a meeting with the group.

• Other highlights:

1. We understand that the lower revenue for the group’s industrial division, specifically in the Australasia region, was due to China’s ban on Australian coal imports amidst soured political relations between the two nations. However, recall that the group took a view that it will not be for long as China will have to source imported coal from the US, which is a tad bit more expensive compared to imported coal from Australia. Sime Darby had estimated that China was responsible for 11% of Australia’s total coal exports and it was guided that some countries i.e. Japan, Indonesia, the Philippines and South Korea have ramped up orders of metallurgical coal. This has helped fill the void left by China in 2QFY21, supporting Sime’s industrial equipment sales.
2. With regards to the RM294.0mil gain on the disposal of Tesco, the group has declared a special dividend of 4.0 sen/share in addition to an interim dividend of 2.0 sen/share. With that, we are forecasting total FY21F dividends to be 15.0 sen/share (including the special dividend) based on a payout ratio of 65%. This translates to a yield of 6.8%. As at 31 December 2020, the group is sitting on a net cash position of RM489.0mil (or 7.0 sen/share).
3. The group mentioned that it has finalized the investment banks for the listing of its healthcare unit. However, we think that the group will be taking it slow as it is looking to improve its earnings post-pandemic. This will boost valuations for the spin-off listing of the 50%-owned Ramsay Sime Darby Healthcare (RSDH) unit. According to media reports, the IPO could raise about US$300.0mil (or RM1.2bil).

Source: AmInvest Research - 26 Feb 2021