Sime Darby Berhad (SIME) announced that it is acquiring Cavpower Group for a cash consideration of AUD500m (RM1,494.8m) to strengthen its Industrial Divisions’ dealership footprint. This move will also see SIME diversifying away from coal markets through exposure to critical materials such as copper, lithium and cobalt in South Australia. We are positive on the acquisition as it complements its existing portfolio and provides geographic expansion into the infrastructure and commodities markets in Australia. Based on our preliminary estimates, the proposed acquisition could see ~2-3% increase to our FY24- 25F earnings forecast, after taking into account the additional funding cost from external borrowings. Nevertheless, we make no adjustments to our estimates pending completion of the acquisition by 2QFY24 (4QCY23). We maintain our Neutral call on Sime Darby with an unchanged TP of RM2.37.

• Proposed acquisition. SIME’s indirect wholly-owned subsidiary Sime Darby Industrial Machinery Australasia Pty Ltd (SDIMA) had, on 14 Aug 2023, entered into a share sale agreement (SSA) to acquire entire share capital of Kuxton Pty Limited and 98.9% share capital of Kagera Pty Ltd from the vendors for a cash consideration of AUD500m (RM1,498.8m), on a cash-free and debt-free basis. Kagera is the holding company of a group of companies that operate the South Australian Caterpillar Dealership (Cavpower), several properties and interests in joint ventures. The purchase consideration is arrived at ~8.5x of FY23 EV/EBITDA.

• Cavpower is a Caterpillar Inc (CAT) dealership based in South Australia servicing primarily the mining, construction, energy and transportation industries. Headquartered in Adelaide, Cavpower employs more than 450 people through a network of nine branches on a hub and spoke model, selling Cat equipment, parts, service and technology solutions.

• Rationale. The acquisition of Cavpower represents an opportunity for geographical expansion of the Industrial Division to enter the South Australian market. The acquisition also complements the Group’s existing portfolio while diversifying away from coal markets into critical materials such as copper, lithium and cobalt in South Australia.

• Financial impact. Assuming the proposed acquisition is financed entirely by external borrowings, SIME’s gearing is estimated to increase from 0.31x to 0.40x. Based on our preliminary estimates, the proposed acquisition could lead to a ~2-3% increase to our FY24-25F earnings forecast, after taking into account the additional funding cost from external borrowings.

Source: PublicInvest Research - 15 Aug 2023