Investment Highlights

• We maintain a HOLD call on Sime Darby with an increased FV of RM2.38/share (from RM2.10) after raising our projected earnings for the group’s industrial segment and including the value of the Malaysian Vision Valley (MVV) land in our SOP valuation.

• Key points from our meeting with the group this week:

1) Scaling up remains its only path to growth as an automotive dealer. The group’s budgeted capex of up to RM2bil over the next five years will cover two short-term priorities: acquiring BMW dealerships in China (where it now has 11 branches and a market share of 5%) and adding more service centers in Malaysia (to reduce waiting times for customers).

2) Industrial segment to lean on an 18-month backlog of orders in Australia driven by the uptick in the mining cycle. It had an order book of RM2.2bil as of end-Dec, with nearly two-thirds of it coming from Australia. However, growth in its other markets (China, Malaysia & Singapore) will be moderate as builders could opt for non-Caterpillar equipment while the Southeast Asian O&G service providers are still refraining from heavy capex spending.

3) Divestment of its logistics segment could start with the sale of its Weifang water asset. The asset has a book value of RM270mil (a return of 4 sen/share) and we believe the group could opt to retain this amount considering that M&A seems to be clearest path moving forward for its core business segments. We note that the group is in a comfortable place to leverage up given its gearing of 0.08x (on a net debt position of RM1.2bil, with 90% of its borrowings being short-term due to its trading businesses).

4) The MVV land will take a long time to monetize. The 8.8K-acre piece of land was acquired for RM2.5bil from Sime Darby Property as part of a settlement for inter-company loans. The group could sell parcels of the land to SD Property (which is jointly developing MVV over a 30-year period; but could opt to first utilize the 3K acres it owns that are more strategically situated by the North-South Highway), or to the developers of the KL-Singapore high-speed rail (which has marked for one station to be placed within SD’s land; and aimed to be completed by 2026). SD advised that the latter is more likely to materialize in the next few years, and it has sensibly chosen not to develop the land on its own.

• We believe the group is approaching the expansion of its core segments and divestment of non-core assets in a thoughtful and measured way.

• We project the group’s net profit to grow by 2-10% annually in the next few years premised on the strength of its BMW dealerships in the key markets of China and Malaysia, and the return of its industrial segment to solid ground.

Source: AmInvest Research - 11 Apr 2018