Sime Darby’s FY18 core earnings of RM853m (-1.2% YoY) was within our expectation and consensus. Sime Darby’s earnings growth in FY19 will be mainly driven by the continued strong industrial equipment demands from Australia mining sector and China construction sector, while other segments are expected to be unexciting. Maintain SELL recommendation with unchanged TP: RM2.15 due to its steep valuation.

Within expectation. Reported core PATMI of RM216m for 4QFY18 and RM853m for FY18, achieving 104.0% of HLIB’s FY18 forecast and 106.3% of consensus.

Dividend. Declared a second interim dividend of 4 sen/share and a special dividend of 2 sen/share. Total dividend for FY18 amount to 8 sen/share (3.1% dividend yield).

QoQ. Core PATMI increased 36.9% following higher contribution from industrial segment on higher sales volume and margins in China and Australia, as well as motor segment on higher sales volume of in Malaysia and RM121m dividend from BMW Malaysia.

YoY. Despite group revenue increased 4.6%, core PATMI dropped 6.1%, mainly dragged by higher effective tax expenses, due to RM71m provisions for the India withholding tax recoverable relating to the legacy Oil and Natural Gas Corporation project as well as deferred tax assets not recognised for tax losses.

YTD. Core PATMI was relatively flat despite an 8.8% growth in revenue, dragged by the loss of net interest income in FY18, following the demerger corporate exercise as well as higher tax expenses.

Outlook. Sime Darby will continue to leverage on the continued strong demand for equipment in Australia mining sector and China construction sector, as outstanding orderbook has increased further to RM2.7bn (from RM2.3bn in 3QFY18 and RM1.4bn in 4QFY17). Motor division is facing stiff competitive pressure and cautious consumer sentiment towards the on-going trade war between China and US, while Malaysia market will face short term impact from the re-introduction of SST in Sep 2018. Logistic division also faces competition and government’s environment control measurements.

Forecast. Earnings Unchanged.

Maintain SELL, TP: RM2.15. Maintain SELL recommendation with unchanged SOP derived TP: RM2.15. We believe Sime Darby’s share price has run ahead of its fundamental value. Valuation is relatively steep at this juncture (FY19-20 P/E of 19.0x and 18.2x) with unattractive dividend yield (2%).

Source: Hong Leong Investment Bank Research - 3 Sept 2018