Investment Highlights

• We maintain our BUY recommendation on Sime Darby with an unchanged SOP-based fair value of RM2.87/share, pegged to FY22F PE of 9x for its motor segment. We make no changes to our FY21–23F earnings estimates.

• Sime Darby’s 9MFY21 core net profit of RM873mil (adjusted predominantly for a RM294mil gain on disposal of Tesco) came in within expectations, accounting for 76% of both our full-year forecast and full-year consensus estimates respectively. 9MFY21 core earnings was up 22% YoY.

• Sime Darby’s motor segment recorded a higher 9MFY21 top line of RM21.3bil (+31% YoY) due to stronger vehicle sales in China (+42% 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 a stellar 9MFY21 core PBIT of RM716mil (+88% YoY).

• Sime Darby’s industrial segment posted a lower 9MFY21 core PBIT of RM665mil (-14% YoY) on weaker PBIT contributions from 3 regions – Australia, Malaysia and Southeast Asia. The Australasia’s industrial segment registered a lower 9MFY21 core PBIT of RM471mil (-18% YoY) due to lower Caterpillar equipment deliveries and parts revenue in the region.

• On the flipside, China’s Industrial segment recorded a significant increase in 9MFY21 revenue to RM3.6bil (+26% 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 impacted by lower margins due to increased competition in the region and cheaper brands, resulting in a margin squeeze by 7 ppts to 3.8% and consequently only a slight increase in 9MFY21 PBIT to RM139mil (+8% YoY).

• Sime Darby replenished its industrial order book to an alltime high level RM2.7bil (+21% QoQ), mainly from the Australasia region (74% of order book).

• Metallurgical coal prices have averaged at US$118/MT for 9MFY21, 23% lower compared to US$153/MT in 9MFY20. This has resulted in the weaker industrial equipment sales in Australasia. Our findings show that metallurgical coal was last traded at US$125. Note that the miner’s breakeven point is US$80/MT as previously guided during a meeting with the group.

• Other highlights:
  1) Sime guided that BMW dividends for this financial year (FY21F) will be slightly lower than FY20. We note that dividends from BMW for FY19 and FY20 were RM135mil and RM120mil respectively.
  
  2) The group has shared that the net book carrying value of the Weifang Port in China was circa RM1.8bil while that for the MVV land was RM2.6bil. Sime is seeking to monetize these non-core assets.

• We believe that the group is on track to deliver its best-ever annual profits with an imminent strong 4QFY21 earnings from both its motor and industrial divisions. We continue to like Sime Darby because it serves as a proxy to China’s growth via its federal and consumer spending – i.e. government’s infrastructure pump-priming measures and consumer discretionary spending on luxury vehicles via two prominent global names under its belt – Caterpillar and BMW, while being able to tap on Australia’s robust mining and consumer sectors.

Source: AmInvest Research - 27 May 2021