Investment Highlights

• We maintain BUY on Sime Darby Bhd (Sime Darby) with a higher fair value (FV) of RM2.90 (from RM2.87) after rolling forward our valuation base year to CY2022 (from FY22), based on revised earnings. Our FV implies 16x PE of CY2022F earnings. The company is a beneficiary of the economic reopening as a pick-up in global infrastructure spending and recovery in discretionary spending will benefit Sime Darby’s motor and industrial divisions.

• Sime Darby’s 2QFY22 results beat our expectation but broadly within consensus’ with core earnings of RM345mil (+46% QoQ, -4% YoY) as we anticipate a stronger 2HFY22. This brings Sime Darby’s 1HFY22 core earnings to RM581mil (-8% YoY) accounting for 51% and 47% of our and consensus’ full-year estimates, respectively. The positive variance is mainly attributed to outperformance of the motor division. Motor and healthcare divisions’ performance was flat while industrial’s earnings declined, offsetting improvement of the logistics’ unit. Note that the reported PBIT of 2QFY21 included a RM294mil one-off gain on disposal of Tesco Malaysia.

• Motor division: Demand remained robust, but inventory shortage dragged sales. The motor division’s sales declined 2% QoQ and 6% YoY as it continued to be hit by supply shortages. Separately, Malaysia and China operations’ PBIT margin improved notably due to higher vehicle margins and strong results from its assembly operation.
  While the inventory shortage issue is likely to persist in the near term, the company continues to see strong demand for luxury cars. This has led to Sime Darby’s order backlog of over one month, reaching the 15,000-unit level in December 2021, almost doubled from January 2021’s of 8,700 units (Exhibit 4). These orders are expected to translate into sales as the supply chain gradually readjusts.

• Industrial division: Order book spiked as metallurgical coal price hit an all-time high. Industrial sales were affected by the slowdown in construction activities in China and demand continues to be weak. However, the prospect of Australasia’s operation remains positive as shown by the jump in its order book to RM3,046mil (+28.4% QoQ, 61.7% YoY) as the price of coking coal continues to climb (Exhibit 5). Most of Sime Darby’s customers in Australasia are coking coal miners and an increase in the commodity price will encourage the miners to raise their capex spending purchasing equipment.

• Earnings revisions. Post-results, we increased FY22F–24F earnings by 5.3%, 2.1%, and 4.0% respectively to reflect the better-than-expected results and for housekeeping purposes.

• Disposal of non-core assets. The disposal of the 307.6 hectares of Malaysia Vision Valley land for RM280mil is expected to be completed in 1HFY23, pending authorities’ approval.

• Dividend. The company declared an interim dividend of 4 sen, which translates into a 46.9% payout ratio of its 1HFY22 earnings.

Source: AmInvest Research - 17 Feb 2022