Investment Highlights

• We downgrade Sime Darby (SIME) to HOLD from BUY with a lower SOP-derived fair value of RM2.21/share (from RM2.58/share previously) given revised forecasts and rolledforward segmental target valuations to FY24F. This implies an FY24F PE of 14x, 0.5 SD below its 5-year mean of 15x and reflects an unchanged neutral ESG rating of 3 stars.

• Our new SOP-based fair value is now premised on a lower target P/E of 8x (from 12x previously) assigned to its motor segment. The valuation assigned is 20% lower than peers such as UMWH’s10x, to reflect subdued situation in China – the group’s biggest motor market. The Chinese market has been very competitive with compressed margins due to continuous steep discounts given to customers.

• Additionally, we also lowered target P/E for its industrial division from 14x previously to 12x, which better reflects the challenging operating environment in China as project progress in the construction sector has been slow despite the full reopening of the economy. While the government has unveiled stimulus plans for infrastructural development, demand for equipment is likely to remain weak until government funding kicks in, which could take some time.

• Sime Darby’s 9MFY23 earnings of RM718mil came in below expectations at 62% - 63% of our FY23F net profit and street’s. As such, we cut FY23F earnings by 5%, FY24F by 6% and FY25F by 8% after factoring in lower margin assumption for its China motor segment. This also reflects lower FY23F-FY25F revenue by 1% - 3%, to account for soft industrial market in China.

• YoY, 9MFY23 revenue rose by 11% on the back of: 1) stronger motor performance (+13%) particularly from Malaysia as carmakers rushed to fulfill orders by 31 March 2023 with sales volume rising 35%, 2) industrial segment grew 6% YoY on stronger revenue growth from all geographical operations except for China.

• Nonetheless, 9MFY23 PBIT was down by 5% YoY, squeezed by weaker motors performance (-34% YoY) as China continued to post lower profit (-79% YoY). The drop was, however, partially softened by the improvement of industrial segment (+29% YoY), contributed by better performance in Australasia (+40% YoY) on higher parts revenue fueled by parts price increases as well as maintenance work for mining equipment.

• Similarly, 3QFY23 topline grew 10% YoY buoyed by higher revenue mainly from motors (+12% YoY) and industrial segments (+4% YoY). Meanwhile, PBIT increased by only 4% YoY, as better results from industrial business (+57% YoY) with Australasia outperforming by 75% YoY was largely offset by subdued motor performance (-28% YoY) on China woes (- 79% YoY).

• QoQ, 3QFY23 PBIT decreased by 1% despite revenue up by 2%, mainly affected by lower results from healthcare segment (-19%) but was mostly relieved by higher results from industrial (+5%) and motor businesses (+13%).

• The company currently trades at a fair FY23F PE of 13x, near its 5-year average of 15x, and a decent dividend yield of 5% amid a challenging business environment in China.

Source: AmInvest Research - 25 May 2023