Results

• Within Expectations - Reported core PATAMI (excluding de-consolidated SD Plantation and SD Property) of RM218m in 2Q18 and RM369m in 1H18, made up 42.0% of HLIB’s forecast and 43.9% of consensus. We deem the results in line as we expect stronger earnings in 2H18 on stronger demand for industrial equipment in China and Australia.

Deviations

• None.

Dividends

• Declared first interim dividend of 2 sen/share.

Highlights

• YoY: Core PATAMI was relatively flat as the higher EBITDA from Industrial segment was offset by higher depreciation charges and lower net finance income (lower finance income from de-consolidated SD Plantation and SD Property).

• QoQ: Core PATAMI improved by 44.4% on stronger contributions on higher demand for Industrial equipment and services and lower effective tax expenses.

• YTD: Core PATAMI was relatively flat at 2.8% YoY due to higher EBIT was offset by the lower net finance income and higher effective tax expenses.

• Comment: Demand for industrial equipment is expected to remain strong especially from coal mining sector in Australia and China due to the high coal prices environment, construction sector in China.

• Motor segment is expected to remain resilient with continued new launches. However, management cautioned on the ongoing stiff competitions and cautious consumer sentiment in major markets.

• Logistics port operations are expected to remain stable despite the ongoing competitions from other ports/terminals. The commencement of a new liquid terminal joint venture later this financial year would support the financial performance of the Weifang Port operations.

Risks

• Prolonged tightening of banks’ HP rules.

• Slowdown in the economy affecting demand for equipment and car.

• Global supply chain disruption for equipment and car.

• Appreciation of US$.

• Drop in commodity prices.

Forecasts

• Unchanged.

Rating

SELL 

• Sime Darby has recently deconsolidated SD Plantation and SD Property by end Nov 2017. Post the exercise, Sime Darby is mainly driven by Industrial and Motor segment. Despite the positive outlook for Industrial segment, Sime Darby is currently trading at a relatively steep valuation.

Valuation

• Downgrade to SELL with unchanged TP RM2.20 , as we believe Sime Darby’s share price has run ahead of its fundamental value. Valuation is relatively steep at this juncture with unattractive dividend yield.

Source: Hong Leong Investment Bank Research - 23 Feb 2018