Sime Darby reported a higher net profit of RM622m (+65.4% YoY, +159.2% QoQ) for 4QFY23, mainly due to gain on property disposal of RM179.0m and higher dividend income at RM194.0m (4QFY22: RM48.0m). Excluding non operating items, cumulative core net profit for FY23 was up marginally by 0.4% YoY to RM1,162.0m. The results were within our estimates at 98% of full year numbers, though above consensus at 115%.

Meanwhile, Sime Darby announced that it is acquiring a 61.2% equity interest in UMW Holdings from PNB for a cash consideration of RM3.5bn or RM5.00 per share to further scale up and strengthen its presence in the Malaysian automotive sector. We are positive on the acquisition as it complements its existing portfolio and reduces geographic concentration risk. Based on our preliminary estimates, the acquisition could see 7% to 12% increases to FY24- 26F earnings forecast, after taking into account the additional funding cost from external borrowing and loss of interest income.

Nevertheless, we make no adjustments to our estimates pending completion of the acquisition by 2QFY24 (4QCY23). We retain our Neutral call on Sime Darby with our sum-of-parts (SOP) based TP revised to RM2.41 (previously RM2.37) as we rollover our valuation to FY25F. Sime Darby declared second interim dividend of 10.0sen per share, bringing total dividend declared for FY23 to 13.0sen. (12MFY22: 11.5sen)

• 4QFY23 revenue rose to RM13.3bn (+22.4% YoY, +15.2% QoQ) on higher sales from both Motor and Industrial divisions. Revenue for Motor division increased to RM8.2bn (+21.8% YoY, +4.8% QoQ) mainly due to higher sales volume in most markets driven by new model launches. For the Industrial division, revenue increased to RM5.0bn (+23.6% YoY, +37.8% QoQ) largely attributed to higher parts sales, supported by parts increases and maintenance work for mining equipment in Australia.

• 4QFY23 core net profit grew to RM463m (+25.1% YoY, +98.7% QoQ) mainly owing to higher profit from Industrial Australasia and strong performance from Motors business in Malaysia. Australasia industrial profit before interest and tax (PBIT) increased to RM338.0m (+27.5% YoY, +59.4% QoQ), in line with higher revenue. Malaysia Motors PBIT doubled YoY to RM253.0m mainly attributed to higher dividend income at RM194m (4QFY22: RM48m) from BMW Malaysia. This was partly negated by lower contribution from China Motors (-31.5% YoY) despite higher sales as vehicle margins remain under pressure due to intense competition.

• Proposed acquisition of UMW. Sime Darby entered into a conditional share purchase agreement with Permodalan Nasional Bhd (PNB) and Amanahraya Trustee Bhd (ART) to acquire 714.8m shares or 61.2% equity interest in UMW Holdings Bhd (UMW) for a total cash consideration of RM3.57bn or RM5.00 per UMW share. Once the agreement becomes unconditional, Sime Darby will be making a general offer (MGO) for the remaining stake it doesn’t hold with the aim of delisting UMW from Bursa Malaysia. The purchase consideration is arrived at ~14.1x price earnings ratio (PER) of FY22 earnings and price-to-book ratio (PBR) of 1.3x, this is within the range of the trading PER and PBR of comparable companies.

• UMW Group is a leading industrial conglomerate based in Malaysia. It was listed on the Main Market of Bursa Securities in 1987. Through UMW Toyota Motor SB (a 51% subsidiary) and Perusahaan Otomobil Kedua SB (Perodua) (a 38% associate), UMW Group is principally involved in the import, manufacturing, assembly, marketing/distribution of “Toyota”, “Lexus” and “Perodua” brands passenger and commercial vehicles and related spares. In addition, UMW Group is also involved in the (i) trading and leasing of light and heavy equipment (Tico, Komatsu, Bomag etc), (ii) manufacturing, assembly and trading of automotive parts (KYB Japan), (iii) manufacturer of fan cases (Rolls-Royce Holdings Plc) and (iv) property development & management (industrial manufacturing park in Serendah).

• Rationale. The acquisition of UMW enables Sime Darby to further scale up and strengthen its presence in the Malaysian automotive sector by adding Toyota, Lexus and Perodua into its Malaysian portfolio. This will position Sime Darby as a leading automotive player with more than 50% market share in Malaysia. The increased contribution from Malaysia will help the Group to further diversify away its geographic concentration risk.

• Financial Impact. Assuming the acquisition is funded by borrowing of RM3.0bn and cash of RM600m. Sime Darby’s gearing is estimated to increase from 0.31x to 0.46x (not including acquisition of Onsite Rental Group amounting to ~RM1.9bn and Cavpower Group amounting to ~RM1.5bn). Sime Darby’s gearing could increase further to 0.62x under the scenario of full acceptance of the MGO and funded by borrowing of RM5.2bn (approximately 90% of the total consideration). Based on our preliminary estimates, the acquisition could lead to a ~7%-12% increase to our FY24-26F earnings forecast, after taking into account the additional funding cost from external borrowing and loss of interest income from its current cash holdings.

• Outlook. Near-term outlook for the Group remains mixed. While Malaysia’s automotive market remains strong, China being the biggest contributor to the Group is seeing faltering growth. Weak trade figures are sparking concerns that China’s economic growth could slow further. China’s car sales fell for a 2nd month in July (-2.6% YoY), after a 2.9% slide in June. Automakers’ steep discounts and government support measures have failed to boost sales thus far. The Chinese government has recently, in June 2023, extended purchase tax breaks on new energy vehicles (NEVs) until 2027. We expect the Chinese government to roll out more concrete plans and measures to prop up the economy and boost demand. As for its Industrial equipment business, demand for mining equipment remains strong, underpinned by elevated commodity prices, infrastructure projects and clean energy transition.

Source: PublicInvest Research - 25 Aug 2023