Investment Highlights

• We reiterate our BUY call on Sime Darby with a lower SOPderived fair value of RM2.58/share (from RM2.76/share previously). This implies an FY23F PE of 14x, at parity to its 5- year mean and reflects an unchanged neutral ESG rating of 3 stars.

• Sime Darby’s 1HFY23 earnings of RM478mil came in below expectations at only 39% of our FY23F net profit and 42% of street’s. In comparison, 1HFY22 accounted for 48% of FY22 earnings. As such, we cut our FY23F earnings by 5%, FY24F by 3% and FY25F by 1% after factoring in lower margin assumption for its China auto segment.

• YoY, the group’s 1HFY23 revenue rose by 11% on the back of: 1) stronger motor division’s performance (+14%) attributed to robust deliveries as carmakers rushed to fulfill orders by 31 March 2023, 2) industrial segment grew 6% YoY as Australasia’s Salmon Earthmoving business outperformed due to higher fleet utilisation on favorable weather as well as more output from new mining contracts. Nonetheless, 1HFY23 PBIT was 10% YoY lower as motors performance was impacted by China’s lower profit (-78% YoY) while partially softened by a better Malaysian segment (+37% YoY).

• QoQ, 2QFY23 topline decreased by 7% as all segments underperformed. However, PBIT increased by 9% QoQ due to: 1) higher profit in China (industrial segment: +47%) and Malaysia (motors division: +7%), largely offset by lower Australasia’s contribution (industrial: -7% and motors: -13%).

• YoY, 2QFY23 topline grew 7%, buoyed by higher revenue mainly from motors (+12%) and marginally from industrial segments. PBIT dropped 16% YoY, impacted by subdued performance in China motors (-90% YoY). However, it was partly alleviated by Malaysia motor’s 40% YoY increase on higher sales volume (+16% YoY).

• The group declared a 1st interim dividend of 3 sen per share for FY23F. We estimate 10 sen per share of dividend for the year, translating to a yield of 4%.

• Looking ahead, the industrial division will be bolstered by a large RM5bil order book in Australia (+12% YoY). Moreover, China’s reopening is expected to push demand for equipment following its relaxation on Australian coal import restrictions. On motors front, Sime Darby is sitting on an order backlog of 18,000–19,000 units which include 5,000–6,000 units for Malaysia (potentially last for 2 – 3 months) and 2,000 units for China.

• The company is currently trading at an attractive valuation of 14x FY23F PE vs. its 5-year peak of 20x with a compelling dividend yield of 4%.

Source: AmInvest Research - 24 Feb 2023