Investment Highlights

• Maintain HOLD on Sime Darby (Sime) with a slightly lower value of RM2.75/share (from RM2.80/share) due to an earnin revision and a change in valuation benchmark to historica year P/E of 12x. While SOP valuation methodology was us previously, we think P/E ratio is now more suitable as business structure has streamlined to a pure commercia industrial automobile supplier. Our neutral 3-star ESG rating unchanged.

• A DPS of 10sen (unchanged YoY) was announced for the peri which will be ex-dividend on 9 Sep with payment on 30 Sep.

• FY24 core PATAMI of RM1,316 mil (+14% YoY) is 4% lower th our forecast, and 6% below consensus. We believe the mar will deem this result as in line with expecations; albeit distor by various disposal gains, impairment, and provisions in Motor division in China.

• FY24 revenue grew by 39% YoY but PATAMI margin slid basis points (bps) to 2.0% mainly due to a 540-bps spike effective tax rate to 32%. The higher tax rate was due to n deductibility on impairments & provisions as well as the suk premiums in 4QFY24.

• We raised FY25/26F earnings by +2.4%/+1.6% on post-resu housekeeping and incorporate management inputs to o assumptions. We also introduce FY27F earnings with increase of 7%, supported by revenue growth of 15%.

• Key inputs from the analyst briefing are as follows:
   
  • The industrial sector is the best performer, with stro demand from construction, mining and data centres.
     
  •  China is notably weak with sluggish demand in construction sector and severe competition in the au segment. Management hesitates to provide any insights as whether the worst is over and things could turn arou anytime soon.
     
  • Perodua and Toyota backlog in Malaysia stood at 100k and 2 respectively.
     
  • The strong Ringgit provides mixed blessings for Sime, foreign translation earnings will be lower, but the Malays operations will benefit from lower input cost.
     
• Net gearing has decreased to 0.45x from 0.47x at the end 3QFY24. Management states that they will continue to p down debts and bring down net gearing further.
   
• ROE was at 5.9%, lower than the historical average of 7%.
   
• Sime currently trades at 11.1x FY25F P/E, close to its long-te average P/E of 12x, which underpins our neutral view on stock.

Source: AmInvest Research - 28 Aug 2024