Sime Darby’s 1QFY19 core earnings of RM189m were within our expectation (20.8%) and consensus (20.6%). The strong contribution from Industrial segment was partially offset by the weaker Motor and Logistic segments. Sime Darby will 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. Adjust earnings for FY19 (+0.7%) and FY20 (-0.4%) and introduce FY21 at RM1bn. Maintain HOLD recommendation with higher TP: RM2.20 (from RM2.15), based on 10% discount to SOP: RM2.45.

Within expectation. Reported core PATMI of RM189m for 1QFY19, achieved 20.8% of HLIB FY19 forecast and 20.6% of consensus. We expect stronger earnings in subsequent quarters, underpinned by strong demand for industrial equipment, especially in Australia market.

QoQ. Overall revenue increased by 3.1% on stronger demand for automotive cars across all regions, which was partially offset by weaker industrial equipment demand in China. However, core PATMI dropped by 35.5%, mainly due to timing of yearly dividend payout by BMW Malaysia to Sime Darby in previous 4QFY18, amounting to RM121m. Excluding the dividend, core PATMI would have increased by 9.9%.

YoY. Core PATMI increased by 38.8%, mainly driven by higher industrial sales and services as well as margin improvements in the segment.

Outlook. Sime Darby will continue to leverage on the continued strong demand for industrial equipment in Australia mining sector and China construction sector. The industrial segment has an outstanding order book of RM2.6bn as at end 1QFY19. Motor division remain affected by the on-going stiff competition and cautious consumer sentiment amidst the growing concern of global trade tension. Logistic division also faces competition and government’s environment control measurements.

Forecast. Adjusted forecasts for FY19 by +0.7% and FY20 by 0.4% for book-keeping purpose. Introduce FY21 PATMI at RM1bn, a growth of +5.3% YoY.

Maintain HOLD, TP: RM2.20. Maintain HOLD recommendation with higher TP of RM2.20 (from RM2.15), based on 10% discount to SOP of RM2.45 post forecast adjustments. 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 - 22 Nov 2018