Sime Darby’s 9MFY19 core PATMI of RM643m, achieved 70.2% of HLIB’s forecast and 71.4% of consensus. We deem the result slightly above expectations as we expect an additional yearly dividend recognition amounting to RM120-130m from BMW Malaysia in 4QFY19. Sime Darby will continue to leverage on the strong demand for industrial equipment in Australia ’s coal sector, while automotive market is facing stiff competition, slowdown in economic growth and cautious consumer sentiment. Raised FY19-21 forecasts by 6.9%, 0.7% and 0.4% respectively. Maintain HOLD recommendation with higher TP: RM2.35 (from RM2.20), based on 10% discount to SOP: RM2.60.

Above expectations. Core PATMI of RM230m for 3QFY19 and RM643m for 9MFY19, achieved 70.2% of HLIB’s FY19 forecast and 71.4% of consensus. We deem the result slightly above our expectations and consensus, as we expect a stronger 4QFY19 attributed to the recognition of yearly dividend payment (amounting to RM120-130m) from BMW Malaysia during the quarter.

Dividend. None.

QoQ. Core PATMI dropped slightly by 4.6% to RM230, dragged by: 1) lower industrial equipment sales in Australia and Malaysia; 2) lower motor sales in Malaysia, Singapore and China; and 3) lower port throughput of Weifang Port.

YoY/YTD. Core PATMI increased by 25.7% YoY and 31.5% YTD, mainly driven by higher industrial equipment sales and services in Australia (driven by coal mining sector) as well as margin improvements in the segment, which was partially offset by weaker contributions from motor sales and logistic contributions.

Industrial. Management guided continued strong demand for industrial equipment in Australia mining sector to support Sime Darby’s earnings for the next 2-3 years. Order book for industrial segment increased further QoQ to RM2.6bn as at end 3QFY19. Furthermore, the demand for construction equipment is expected to remain sustainable in China and improving in Malaysia as governments increase spending on infrastructure.

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

Forecast. Raised FY19-21 forecasts by 6.9%, 0.7% and 0.4% respectively.

Maintain HOLD, TP: RM2.35. Maintain HOLD recommendation with higher TP of RM2.35 (from RM2.20), based on 10% discount to SOP of RM2.60. Sime Darby is expected to continue leveraging on the booming coal mining industry in Australia, while other automotive and industrial segments in China and South East Asia faces stiff competition, cautious consumer sentiment and trade war risks.

Source: Hong Leong Investment Bank Research - 30 May 2019