Investment Highlights

• We maintain HOLD on Sime Darby with a higher FV of RM2.47/share (from RM2.38/share). The group’s core net profit of RM703mil for the 9MFY18 period was above expectations, meeting 86% of our FY projection and 80% of consensus. Exceptional items include losses incurred by the motors division in Vietnam, gain on property disposals of its industrial segment, and several impairments and write-downs

• We raised FY18-20 earnings by 2-7% on the strength of the group’s BMW dealerships which will benefit from launches of new models in the coming quarters, and the extensive backlog for its industrial segment anchored to the uptick in Australia’s mining cycle.

• A breakdown of its 9MFY18 results by segment:

1) Industrial. Core PBIT increased 63% YoY (after excluding a gain of RM165mil from the disposal of properties in Australia and Malaysia) as it continues to ride on the boom of activity in the construction and mining sectors in Australia and China. Profit in 3Q dropped slightly despite a 22% YoY increase in revenue due to the loss of certain claims on jobs that were not recoverable in Australia.

2) Motors. Core PBIT improved 15% YoY due to better profit in China and Hong Kong. Topline performance was mixed as a single-digit YoY improvement was seen in Malaysia and other SEA markets, while China and Australasia were flat and lower respectively. The lower revenue in Australia was likely due to the cessation of Peugeot and Citroen sales there.

3) Logistics. Core PBIT expanded 25% YoY as the Weifang port continued to deliver. The segment continues to demonstrate vastly better margins than the preceding two segments (at 18-20% vs. 2-3% for industrial and motors). We understand the divestment of the segment will begin with the sale of its Weifang water asset, which had a book value of RM270mil (a return of 4 sen/share). We believe the group would opt to retain this amount considering that M&A is the clearest path forward for its core segments.

• The 3Q was the first quarter in which earnings were unaffected by the discontinued operations as the demerger from the plantation and property units executed in Nov 2017. We believe there is some progress to be made on the earnings clarity of the group as it still faces various EIs every quarter.

• The group raised its concern for the rise of trade protectionism. We believe the key market concerned is China which accounts for the largest chunk of revenue for its motors segment (43%; and 38% of the group’s revenue). The country said recently it would cut the import tariff for cars to 15% to 25% from July. While it could benefit Sime, we emphasize that China remains a competitive market due to the deeply segregated market there. It has earmarked part of its RM2bil capex budget for the next half-decade towards acquiring more dealerships in China.

Source: AmInvest Research - 28 May 2018