Investment Highlights

• We reiterate our BUY call on Sime Darby with a lower SOPderived fair value of RM2.76/share (from RM2.88/share) after accounting for the adjusted net debt as at 30 June 2022. This implies an FY23F PE of 14x vs its 5-year mean of 15x, and reflects an unchanged neutral ESG rating of 3 stars.

• Sime Darby’s 1QFY23 core net profit (CNP) of RM223mil came in largely within expectations at 18% of our FY23F net profit and 19% of the street’s. In comparison, 1Q accounted for 19% of full-year FY21-FY22 CNP. As such, we maintain our FY23F-FY25F earnings.

• YoY, the group’s 1QFY23 revenue rose by 14% on the back of improvements in all business segments. Motor revenue increased by 16% to RM7,955mil as consumers rushed for orders before the expiry of sales & service tax (SST) exemption by 30 June 2022. This was supported by industrial revenue growing by 12% to RM4,212mil from the acquisition of Australia-based Salmon Earthmoving Holdings in late 2021.

• Nonetheless, 1QFY23 CNP dropped 6% YoY mainly due to lower margin contribution from China operations, which was affected by high discounts despite higher units sold (+6%).

• On a QoQ basis, while 1QFY23 topline was up by 12%, CNP declined by 41% as industrial operations in Australia posted lower profits on reduced equipment margins. This was partly affected by lower contributions from Motors businesses in Australia as well as discounts provided to customers in Malaysia.

• It is also noteworthy that Sime Darby’s healthcare segment, being the smallest operating division, registered higher operating profit, up 46% YoY and 2x QoQ, underpinned by higher patient volumes as Covid 19 transitions to endemic status.

• The group has also completed the sale of Weifang Port companies in China for CNY2bil (RM1bil) in the beginning of November 2022, marking its full exit from a non-core business.

• Sime Darby’s near-to-medium term outlook remains positive due to continuous roll-out of new models coupled with growing opportunities in the electrical vehicle (EV) market.

• The company is currently trading at an attractive valuation of 12x FY23F PE vs. its 5-year average of 15x with a compelling dividend yield of 5%.

Source: AmInvest Research - 25 Nov 2022