Sime Darby’s 9MFY18 core earnings of RM585m (-4.6% YoY) were below our expectation and consensus, affected by high depreciation charges and low net interest income. The company is expected to continue to leverage on the strong demand for industrial equipment in Australia coal sector and China construction sector, while automotive market is facing stiff competitions and cautious consumer sentiment. Cut earnings for FY18, FY19 and FY20 by 6.7%, 2.8% and 3.2%. Maintain SELL recommendation with lower TP: RM2.15 (from RM2.20) due to its steep valuation.

Below expectation. Reported core PATMI of RM216m for 3QFY18 and RM585m for 9MFY18, achieving only 66.6% of HLIB FY18 forecast and 66.8% of consensus. The disappointment was mainly due to higher than expected depreciation charge and lower than expected net interest income.

QoQ. Despite group revenue dropped 5.9%, core PATMI only dropped marginally 0.9%, attributed to: (1) better performance of BMW in China and Hong Kong; (2) cessation of Peugeot and Citroen dealerships in Australia and New Zealand; and (3) higher attributed profit from JV Sime Ramsay Healthcare for higher business revenue and tax adjustments.

YoY. Core PATMI dropped 15% mainly on lower net interest income post de consolidation of Plantation and Property divisions, given lower inter-company borrowing.

YTD. Core PATMI dropped marginally 4.6% mainly on lower net interest income, which was partially offset by higher group EBIT on higher revenue from Industrial division and improved margin of Motor division, post ceasing operation in Vietnam and cessation of Peugeot and Citroen dealerships in Australia and New Zealand.

Outlook. Sime Darby will continue to leverage on the continued strong demand for industrial equipment in Australia mining sector and China construction sector. Motor division will remain resilient with new model launches to excite the market despite the on-going stiff competition and cautious consumer sentiment. Logistic division also face competition and government’s environment control measurements.

Forecast. Cut earnings for FY18, FY19 and FY20 by 6.7%, 2.8% and 3.2% to account for the higher depreciation charges and lower net interest income.

Maintain SELL, TP: RM2.15. Maintain SELL recommendation with lower SOP derived TP: RM2.15 (from RM2.20) post earnings adjustments. 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 - 28 May 2018