Investment Highlights

• We maintain a HOLD and an RNAV-based FV of RM2.10/share on Sime Darby based on an FY19 PE multiple of 12x on its motor segment.

• Sime Darby saw its core PBIT improve 8% YoY to RM453mil in 1H18 ended Dec 2017, meeting expectation at 49% of our FY projection. Core net profit of RM484mil was at 53% of the FY consensus.

• Motors led on the topline level (accounting for 62% of revenue) but came in second on PBIT after Industrial, owing to the segment's relatively thin pre-tax margin of 2-2.5%.

• A breakdown of the group's 1H18 results by segment:

1) Industrial. Core PBIT grew 115% due to higher sales in Australia and China, on the back of recovery in the mining sector and healthy spending on infrastructure respectively. The core earnings excludes a RM165mil gain from the sale of properties in Australia and China.

2) Motors. Core PBIT grew by a 19% YoY on strong growth in China, Australia and New Zealand. The core earnings excludes the cost of RM184mil from exiting the BMW distribution in Vietnam, gain from land compensation of RM41mil in China and a branch compensation of RM9mil in Malaysia.

3) Logistics. Core PBIT grew 37% on the higher throughput at Weifang Sime Darby Port.

4) Others. Core PBIT from its other businesses rose 3%. Improvements include earnings from its healthcare JV (Ramsay Sime Darby Healthcare), where PBIT rose 32% to RM25mil.

• Sime Darby demerged from its plantation and property units on Nov 30. It said the motors division will rely on the launches of new models and efforts to expand, although competition and the cautious consumer sentiment are still an impediment.

• We project for net profit to grow 2-9% annually in the next few 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 reiterate that the recent demerger of the plantation and property businesses should improve the clarity in earnings of Sime Darby's continuing operations, but there is still room to rationalise.

Source: AmInvest Research - 23 Feb 2018