Sime Darby Berhad (Sime) announced in an analyst briefing held yesterday that it is acquiring Salmon Earthmoving Holdings (Salmon) for AUD104m to expand its adjacent business (rental) and also to diversify into new industry (construction). The acquisition allow Sime Darby to capitalize on Australia Government 10 years AUD15.2bn infrastructure project announced recently, as part of its stimulus measure to support employment in the post-pandemic economy. We are positive on the acquisition as it complements its existing Australia operations and offers diversification to other OEM brands including Hitachi, Komatsu, Mack and Isuzu equipment. Our earnings forecasts remain unchanged. We maintain our Outperform call on Sime Darby with SOTP based unchanged target price of RM2.78.

• Proposed acquisition. SIME Darby signed SPA to acquire 100% of Salmon on 3 July 2021 for AUD104m (or RM327m) on a cash free debt free basis. Salmon is a dry-hire earthmoving equipment business which rents and supports a diverse range of Caterpillar machinery in the mining and construction sectors in Australia, mainly Queensland and New South Wales. The purchase consideration is arrived at EV/EBITDA FY21E of 5.6x.

• Rationale. Salmon is expected to strengthen and complements Sime’s operations in Australia as well as reinforces its footprint in Asia Pacific in terms of value chain offerings. With this acquisition, Sime will be able to diversify its rental equipment offering to civil construction market and provide a wider range other OEM brands including Hitachi, Komatsu, Mack and Isuzu equipment.

• Minimal financial impact. In terms of earnings contribution, Salmon is expected to add AUD13m (or RM41m) PBIT a year to the group. This only translates to a 3% enhancement to FY22-23F earnings forecasts. The acquisition is expected to be financed via debt and gearing of the group would increase from 0.09x to 0.11x.

Source: PublicInvest Research - 8 Jul 2021