Sime Darby’s FY19 core PATMI of RM1,007m (+15.1% YoY), was within our expectations. Sime Darby will continue to leverage on the strong demand for industrial equipment in Australia’s coal sector with improving equipment demand outlook in Malaysia. On the other hand, automotive segment remains competitive amidst the slowdown in economic growth and cautious consumer sentiment. Declared a second interim dividend of 7sen/share and a special dividend of 1sen/share (ex-date: 30 Sep 2019). Maintain HOLD recommendation with unchanged TP: RM2.35, based on 10% discount to SOP: RM2.60.

Within expectations. Core PATMI of RM364m for 4QFY19 (+58.3% QoQ, -5.7% YoY) and RM1,007m for FY19 (+15.1%), achieved 102.8% of HLIB’s FY19 forecast and 106.6% of consensus. We recognised RM135m dividend received from BMW Malaysia in 4QFY19 as part of core profit for FY19 (vs RM121m in 2018). Major exceptional items for FY19 were RM119m share of exceptional loss in relation to Weifang Port Services (WPS), RM126 gain on disposal gain on several assets, RM117m impairment loss in E&O stakes and RM129m tax credit gain.

Dividend. Declared a second interim dividend of 7sen/share and a special dividend of 1sen/share (ex-date: 30 Sep 2019). Total dividend for the financial year would be 10sen/share, translating into a 4.7% dividend yield.

QoQ. Core PATMI improved by 58.3% to RM364m, mainly attributed to RM135m dividend investment income from BMW Malaysia.

YoY. Core PATMI declined marginally by 5.7% on lower core contribution from JVs and associates.

YTD. Core PATMI increased by 15.1% YoY, 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, logistic and healthcare segments.

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. Likewise, the demand for construction equipment is expected to remain sustainable in China and improving in Malaysia as governments increase spending on infrastructure. Nevertheless, order book for industrial segment has declined QoQ to RM2.4bn (from 2.6bn) as at end 4QFY19

Motor. On the other hand, motor division remain affected by the on-going stiff competition, slowdown in economic growth and cautious consumer sentiment amidst the growing concerns 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. Sime Darby is also banking on the demand from China’s growing middle class to sustain sales volume.

Forecast. Unchanged.

Maintain HOLD, TP: RM2.35. Maintain HOLD recommendation with unchanged TP of RM2.35, 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 - 28 Aug 2019