Investment Highlights

• We value Sime Darby Group with an RNAV-based FV of RM2.10/share, based on a conservative FY19PE multiple of 12x on its motor segment.

• We project for net profit to grow 2-9% annually in the next 2- 3 years premised on the strength of its BMW distributorship in the key markets of China and Malaysia, its dealership of Caterpillar heavy equipment in APAC and unrealized potential of its ports in China.

• We note three points to expound on, following our Oct 24 report ("A primer to new Sime Darby"):

1) The motor segment relies on brand and geographical diversity, but the group's margins are weakest here given its position at the end of the value chain. BMW still sees an active product pipeline and Sime Darby will release the X3 and X5 this quarter. While BMW sales here have outperformed the industry’s (10MCY17: +20%YoY vs. TIV's 1%YoY), we note that net margins for BMW Malaysia had bottomed in recent years given the soft consumer sentiment and competitive environment.

2) The logistics segment contributes a miniscule percentage of the group's topline but sees significantly stronger margins. Organic growth will be the slow and steady path up: Sime Darby targets growing total capacity to 100 million MT by 2020 for the four ports in China.

3) While the recent demerger of the plantation and property businesses should improve the clarity in earnings of Sime Darby's continuing operations, there is still room to rationalize. The chief targets are the Ramsay Sime Darby Health Care joint venture, as well as its stakes in Eastern & Oriental (11.6%) and Tesco Stores Malaysia (30%). The net returns to Sime Darby from these units have been unsatisfactory and Tesco has been in the red in recent years. The group had acquired land in Malaysia Vision Valley that could be of interest given its proximity to the HSR. We believe a more pointed focus on its core businesses would be a key catalyst for Sime Darby going forward.

• Sime Darby's gearing improved to a moderate 0.20x (from 0.32x) following the demerger as its borrowings stand at RM3.2bil from RM13.1bil before next to RM2bil in cash. The perpetual sukuk of RM2.2bil under Sime Darby Plantation will also be taken off its books.

Source: AmInvest Research - 8 Dec 2017