Investment Highlights

• We reiterate our BUY call on Sime Darby (Sime) with the same SOP-derived fair value of RM2.58/share. 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 entered into a deal yesterday to purchase the entire stake in Onsite Rental Group Limited, Australia (Onsite) for a cash consideration of AUD635mil (RM1.9bil), which represent a significant 12% of the group’s market cap of RM16bil.

• The acquisition allows the group’s industrial division to reap the opportunity to enter the business-to-business (B2B) rental services market, which complements its existing rental offering via wholly-owned subsidiaries - Salmon Earthmoving and Hastings Deering. This could bolster its participation across the industrial equipment rental spectrum in Australasia.

• In FYE June 2022, Onsite posted a revenue of AUD302m (RM911mil) and net profit of AUD33mil (RM100mil), which translates to an acquisition PE of 19x.

• Given Sime Darby’s lower FY23F PE of 14x currently, the near-term earnings accretion from the deal is minimal, assuming interest costs at 5% for the additional loans to fund the acquisition.

• With the additional external borrowings, we estimate Sime Darby’s FY23F net gearing to rise to 13%-14% from 2%. The deal is expected to be completed by 4QFY23.

• Notwithstanding the minimal near-term earnings impact, the acquisition EV/EBITDA of 5.2x for Onsite appears reasonable given the higher EV/EBITDA of 6.5x paid in 2017 by Seven Group Holdings for Coates Hire - one of Australia’s biggest nationwide industrial and general equipment hire business.

• Established in 1990, Onsite is one of the largest B2B equipment rental service providers in Australia, providing services primarily to mining and construction industries. It has 39 branches that run across Western Australia and Queensland, with rental solutions involving access, power & tool equipment, site accommodation, materialshandling, industrial tools and small-scale earthmoving as well as compaction.

• 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 - 3 Mar 2023