Sime Darby’s 1HFY19 core earnings of RM453m were within our expectation (49.5%) and consensus (49.9%). 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, while the automotive market is facing stiff competition, slowdown in economic growth and cautious consumer sentiment. Declared first interim dividend of 2 sen. Maintain HOLD recommendation with unchanged TP: RM2.20, based on 10% discount to SOP: RM2.45.

Within expectation. Reported core PATMI of RM261m for 2QFY19 and RM453m for 1HFY19. This achieved 49.5% of HLIB FY19 forecast and 49.9% of consensus.

Dividend. Declared first interim dividend of 2 sen for 1HFY19.

QoQ. Core PATMI increased 35.9% 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 BMW and super luxury vehicles in China.

YoY. Core PATMI increased by 24.9%, mainly driven by higher industrial sales and services in Australia (driven by coal mining sector) as well as margin improvements in the segment.

YTD. Similarly, core PATMI increased by 30.9%, mainly driven by higher industrial sales and services as well as margin improvements in the segment (especially in Australia), which was slightly offset by lower contribution from both motor and logistic segments.

Industrial. Management guided continued strong demand for industrial equipment in Australia mining sector to support Sime Darby’s earnings growth. Order book for industrial segment remained stable QoQ at RM2.5bn as at end 2QFY19. Management is unperturbed by China’s recent move in delaying custom clearance of coal imports from Australia due to trade tensions. Management believes Australia’s mining sector has been under-invested for the past years and expects demand for mining equipment to remain strong as the mining giants increase investment to increase output.

Motor. However, motor division remains affected by the on-going stiff competition, slowdown in economic growth and cautious consumer sentiment amidst the growing concern of global trade tension. Management continued to focus on new model launches and OEM incentives as well as business diversification to mitigate the adverse effects.

Forecast. Unchanged as the Results Were Inline.

Maintain HOLD, TP: RM2.20. Maintain HOLD recommendation with unchanged TP of RM2.20, based on 10% discount to SOP of RM2.45. Sime Darby is expected to continue to 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, cautious consumer sentiment and trade war risks.

Source: Hong Leong Investment Bank Research - 22 Feb 2019