Investment Highlights

• We maintain BUY on Sime Darby with an unchanged SOPderived fair value (FV) of RM2.90, which implies CY2022F PE of 16x. The company is a beneficiary of the economic reopening as the rally in commodity prices and recovery in discretionary spending will benefit Sime Darby’s industrial and motor divisions.

• Sime Darby’s 3QFY22 results were broadly in line with our and consensus’ FY22F earnings. 3QFY22 core earnings of RM235mil (-32% QoQ, -2% YoY) bring 9MFY22 core net profit to RM816mil (-7% YoY), accounting for 68% of our FY22F estimate and 67% of consensus as we anticipate seasonally stronger 4QFY22 earnings.

• The industrial division’s earnings were affected by the challenging backdrop given the ongoing Ukraine-Russia geopolitical conflict and China lockdowns. However, the impact was partially offset by a stronger motor division, driven by robust demand for luxury cars.

• Nevertheless, expecting a relatively lower dividend payout from BMW Malaysia compared to previous years, our FY22F–FY23F earnings have been slightly adjusted by 1%–3% after revising downwards dividend payout ratio assumptions to 28% from 52% in FY22F and 38% from 48% in FY23F.

• Motor sales were decent at RM6,981mil (+3% QoQ, +0% YoY) despite inventory shortages and lockdowns in China. Unperturbed by the challenging environment, the Greater China region reported fair sales of RM3,417mil (+12% QoQ, -2% YoY). Notably, the segment’s Malaysian PBIT margin improved 1.5% points QoQ and 3.3% points YoY due to improvement in vehicle margin and higher contribution from the assembly business.

• Demand for luxury cars continues to be robust with Sime Darby’s order backlog growing to 2.5 months from 1–2 months in the same period last year. We expect improvement in sales, albeit gradually, moving forward as the supply chain readjusts.

• 3QFY22 industrial sales (-6% QoQ, -11% YoY) were affected by the slowdown in construction activities in China due to the lockdowns. Demand for equipment in China is likely to remain subdued in the near term due to lockdown uncertainties affecting business sentiments.

• However, we expect it would be partially offset by improvement in other operating markets’ performance. The industrial division’s order book remains elevated at RM3,928mil (2QFY22: RM3,969mil), driven by high commodity prices and the revival of mega projects in Malaysia i.e. the MRT3 and Pan Borneo Highway.

• The stock currently trades at an attractive CY22F PE of 13x vs. its 4-year average of 17x with a decent dividend yield of 4%.

Source: AmInvest Research - 25 May 2022