Sime Darby is acquiring Heavy Maintenance Group (HMG) for cash consideration AUD58.0m (RM172.0m), which will be completed by end 2018. While we are positive with the acquisition as HMG will complement Sime Darby’s growing industrial segment in Australia (especially in mining sector), we reckon the additional contribution to be immaterial towards Sime Darby’s large earning base. Upgrade to HOLD recommendation (from Sell) with unchanged TP: RM2.15 (10% discount to SOP: RM2.40), given the recent drop in share price.

NEWSBREAK

Sime Darby has entered into a share purchase agreement with Pemba Capital Partners and other minority interests to acquire 100% of Heavy Maintenance Group (HMG) in Australia for a total cash consideration of AUD58.0m (RM172.0m) on a cash-free and debt-free basis, which will be funded by external borrowings. The acquisition exercise is expected to complete by end 2018.

HMG is involved in the manufacture, refurbishment and surface finishing of equipment used in the heavy industrial sector (mainly for mining and oil & gas).

HLIB’s VIEW

Positive. We are overall positive on the proposed acquisition exercise, as HMG will complement Sime Darby’s existing heavy equipment sales and services business segment in Australia. However, we reckon the contribution from HMG would be relatively small and immaterial (based on assumed PE 15x, working out to an earnings of c.RM12m) towards Sime Darby’s large earning base of over RM800m per annum.

Forecast. Unchanged.

Upgrade to HOLD, TP: RM2.15. Upgrade to HOLD recommendation (from Sell) with unchanged TP: RM2.15 based on 10% discount to SOP: RM2.40, given the recent drop in share price. Sime Darby is expected to continue leverage on the booming coal mining industry in Australia, while other automotive and industrial segment in China and South East Asia face with stiff competitions and trade war risks.

Source: Hong Leong Investment Bank Research - 31 Oct 2018