Sime Darby’s 2QFY20 core PATMI of RM299m (-2.6% QoQ, +14.1% YoY) and 1HFY20 of RM606m (+32.0% YoY), in line with HLIB (51.1%) and consensus (58.8%). The strong YoY and YTD showing were driven by strong industrial equipment demand from Australia’s mining sector and China’s infrastructure sector. Maintain BUY with lower TP: RM2.40 (from RM2.70), based on 20% discount to SOP: RM3.00, with attractive dividend of 12 sen (6.0% yield). We expect Sime to continue leveraging on Australia’s mining sector in the short term, cushioning the potential negative impact of Covid-19 outbreak. Once Covid-19 is better controlled, Sime would be a major beneficiary of China’s stimulus plan on infrastructure spending.

Within expectations. Core PATMI of RM299m for 2QFY20 (-2.6% QoQ, +14.1% YoY) and RM606m for 1HFY20 (+32.0% YoY), achieved 51.1% of HLIB’s FY20 forecast and 58.8% of consensus. Despite the anticipated annual dividend income from BMW Malaysia in 4QFY20, we believe Sime Darby’s operation in China would be adversely affected by Covid-19 in 2HFY20. Subsequently, there might be a slowdown in heavy equipment demand in Australia

Dividend. Declared an interim dividend of 2sen/share (ex-Date: 24 April).

QoQ. Despite the stronger operational profits, core PATMI stayed relatively flat -2.6% to RM299m, mainly due to higher effective tax rate during the quarter.

YoY/YTD. Core PATMI improved by 14.1% YoY and 32.0% YTD, driven by stronger contribution from Industrial segment (higher sales and margins in Australia and China, as well as new contributions from newly acquired Gough in 2QFY20) and Motor segment (higher sales volume in China with improved margins following lower discounting program).

Industrial. At the moment, the potential impact of Covid-19 outbreak cannot be accurately assessed. The virus may affect both the demand and supply chain of Industrial segment. Currently, management guided the demand for mining equipment in Australia has remained resilient. Management expects China to implement a stimulus plan once the outbreak is better contained. Order book for industrial segment rose QoQ to RM2.9bn (from 2.5bn) as at end 2QFY20, driven mainly by Australia market.

Motor. Similarly, China motor demand will be affected by Covid-19 outbreak in the near term. We have seen new cases in China tapering down while its government is gradually loosening the tight control of citizen movements with implementations of safety health precautions. Motor demand in other markets i.e. Hong Kong, Taiwan, Malaysia, Singapore, Thailand and Australia are expected to remain muted as well.

Forecast. Unchanged as the Results Were Inline.

Maintain BUY, TP: RM2.40. We maintain our BUY recommendation with lower TP of RM2.40 (from RM2.70), based on 20% (from 10%) discount to SOP of RM3.00. We expect Sime Darby to continue leverage on Australia’s mining sector to sustain profits in the near term, given the strong outstanding orderbook, which may cushion the short term negative impact of Covid-19. With China’s good progress in controlling the Covid-19 outbreak as well as committed stimulus plan on infrastructure spending once the outbreak is better controlled, Sime Darby would be one of the main beneficiaries. Currently, Sime Darby is trading at attractive valuation of 11.5x PE with projected 6% dividend yield.

Source: Hong Leong Investment Bank Research - 27 Feb 2020