Investment Highlights

• We maintain BUY on Sime Darby with an unchanged SOPderived fair value (FV) of RM2.88, which implies FY23F PE of 16x. The company is a beneficiary of the economic reopening as the rally in commodity prices and recovery in broader economic activities reinforce Sime Darby’s industrial and motor contributions.

• Sime Darby’s 4QFY22 core earnings of RM379mil (+61% QoQ, +1% YoY) were broadly in line with our expectations but above consensus’. FY22 core net profit of RM1,195mil (-4% YoY) was 3% ahead of our estimate and 6% of consensus.

• A second interim dividend of 7.5 sen/share was declared, bringing FY22 dividend payout to 11.5 sen/share (65% payout ratio). This exceeded our expectation of 10 sen/share (57% payout ratio). Post-results, we make no changes to our earnings forecasts.

• Despite being plagued by supply shortage issues and demand shocks due to China lockdowns, Sime Darby still managed to deliver a decent FY22 revenue of RM42.6bil (-4% YoY). Both its motor and industrial divisions recorded lower PBIT, dragged down by their China units.

• Zooming in on segmental breakdowns, Australasia’s industrial performance remained resilient as its FY22 PBIT grew 1% despite higher operating expenses. The unit’s future sales are expected to be driven by pent-up demand for repair & maintenance services which generally command better margins.

• The industrial division’s future sales are backed by its robust order book, which recently hit a new high of RM4.4bil (+13% QoQ) that was predominantly driven by high commodity prices. Besides strong demand from Australasia’s miners, demand for equipment in Malaysia is also expected to pick up in FY23 following the revival of mega infrastructural projects.

• The motor segment’s FY22 PBIT declined 4% YoY as the outperformance by its Malaysian motor unit helped to partially offset China’s sluggish earnings. Moving forward, Malaysia’s order pipeline is expected to remain robust until March 2023 following the extension of the SST exemption registration period.

• Despite the headwinds, China’s order book is back to the pre-lockdown level of 1.5 months, signifying healthy demand. Meanwhile, at the group level, the order backlog now stands at 2.5 months vs. 1–2 months last year.

• The company is currently trading at an attractive valuation of 12.8x FY23 PE vs. its 5-year average of 17x.

Source: AmInvest Research - 18 Aug 2022