Sime Darby is acquiring Gough Group for an Enterprise Value of NZD211m (RM572m), which will be completed within 3QCY19. While we are positive with the acquisition as Gough Group complements Sime Darby’s strength as global Caterpillar dealership, we reckon the additional contribution would be marginal towards Sime Darby’s large earnings base. Maintain HOLD recommendation with unchanged TP: RM2.35 (based on 10% discount to SOP: RM2.60).

NEWSBREAK

Sime Darby has entered into a share purchase agreement with Gough Holdings to acquire 100% Gough Group (GGL) in New Zealand for an Enterprise Value of NZD211m (RM572m) subject to adjustments on net debt and working capital, which will be funded through external borrowings. The acquisition exercise is expected to be completed within 3QCY19.

GGL has the Caterpillar (CAT) dealership with service territory in New Zealand and interests in the transport and materials handling business in New Zealand and Australia. The group registered NZD540m in revenue in 2018, driven by strong sales for both its Caterpillar and transport and material handling businesses.

HLIB’s VIEW

Positive. We are overall positive on the proposed acquisition exercise, as GGL will complement Sime Darby’s global dealership network for CAT. In New Zealand, we reckon the demand for CAT equipment is tilted more towards the construction sector. Based on margin of assumption of 2-3% (similar to Msia), net profit of GGL would be NZD10-16m (RM27-43m) in 2018, giving a marginal increment to Sime Darby’s expected earnings of RM950m and RM1bn in FY20 and FY21 respectively.

Forecast. Unchanged.

Maintain HOLD, TP: RM2.35. Maintain HOLD recommendation with unchanged TP: RM2.35, based on 10% discount to SOP of RM2.60. Sime Darby is expected to continue to leverage 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 - 14 Aug 2019