Sime Darby reported lower core net profit of RM236.0m for 1QFY22 (YoY: - 13.2%, QoQ: -37.1%). The results were below our and consensus expectations, accounting for 18.0% and 18.2% of full-year estimates respectively. Results for the Group in current quarter were impacted by market contraction for industrial equipment in China and Covid-19 restrictions in certain countries. While demand for luxury vehicles is expected to remain strong, especially in China, vehicle sales may be impacted by the ongoing supply chain issues and shortage of semiconductor chips. Management anticipates minimal impact from Cukai Makmur but the taxing of foreign sourced income (as announced during the tabling of Budget 2022) may materially impact the Group‟s profit after tax going forward. We cut our earnings forecast for FY22F/23F/24E by 16%/15%/15% to factor in weaker vehicle sales and higher tax cost. Our SOTP-based target price subsequently lowered to RM2.32 (from RM2.78 previously). Given the limited upside potential, we downgrade our call on Sime Darby from Outperform to Neutral.

• 1QFY22 revenue fell to RM10.7bn (YoY: -1.9%, QoQ: -5.9%) mainly due to lower revenue from Industrial division in China (YoY: - 29.9%, QoQ: - 33.5%) and Motor division in Malaysia (YoY: -32.9%, QoQ: +5.9%). Industrial business in China was impacted by market contraction while Motor division in Malaysia was affected by the lockdown.

• 1QFY22 core net profit came in at RM236m (YoY: -13.2%, QoQ: -37.1). The lower core net profit was mainly due to decline in profit from Industrial operations in China, impacted by the slowdown in construction activities and weaker margins from intense competition. Despite lower revenue, Motors division in Malaysia registered higher profits due to higher vehicle margins, improve profit contribution from assembly operations and reversal of stock provision. Nevertheless, the higher profits were partly offset by lower profits in Singapore and Australasia due to Covid-19 restrictions.

• Outlook. The outlook for Industrial division is mixed. Although strong commodity prices and government fiscal stimulus would support equipment sales, the spillover effects from the property debt crisis and the intense competition from local manufacturers and may continue to impact the Industrial business in China. For the Motor divisions, demand for luxury vehicles is expected to remain strong, especially in China however vehicle sales may be affected by semiconductor supply constraint.

Source: PublicInvest Research - 30 Nov 2021