Sime Darby’s 3QFY20 core PATMI of RM141m (-52.8% QoQ, -44.3% YoY) and 9MFY20 of RM747m (+4.9% YoY) was in line with HLIB (74.5%) but above consensus (81.3%). The drop QoQ and YoY were mainly affected by city lockdowns in China market. We believe earnings have bottomed in 3QFY20 and expect gradual recovery in coming quarters. We maintain our BUY recommendation with higher TP: RM2.25 (from RM2.00), based on lower 10% discount (from 20%) to SOP: RM2.50. We expect Sime to continue leveraging on Australia’s mining sector in the short term while China market (post easing of lockdown measures) has experienced recovery since April, cushioning the negative impact of Covid-19 outbreak in other markets.

Within expectations. Core PATMI came in at RM141m for 3QFY20 (-52.8% QoQ, -44.3% YoY) and RM747m for 9MFY20 (+4.9% YoY), making up 74.5% of HLIB’s FY20 forecast and 81.3% of consensus. With the anticipated annual dividend income from BMW Malaysia (RM120m) in 4QFY20, we deem the 9MFY20 result to be in line with our forecast, but above consensus. The gradual opening up of China market as well as sustaining Australia mining sector in 4QFY20 are expected to cushion the impact of the implemented lockdowns measures on Sime Darby’s “other geographical market”.

Dividend. None.

QoQ & YoY. Affected by Covid-19, city lockdowns in China and its extended Chinese New Year holiday, core PATMI dropped by 52.8% QoQ and 44.3% YoY due to lower sales and margins recorded. Nevertheless, industrial mining segment in Australia remains resilient with stable revenue and profits.

YTD. Core PATMI improved by 4.9% YTD, mainly driven by stronger contribution (especially during 1HFY20) from industrial segment (higher sales and margins in Australia and China) and motor segment (higher sales volume in China with improved margins following lower discounting program).

Industrial. The impact of Covid-19 outbreak is not material towards Australia mining sector as it is considered as “essential service”, while construction sector has seen some recoveries in China market. Currently, management guided the demand for mining equipment in Australia has remained resilient while various stimulus measures has started to be implemented in China as the country gradually eased lockdown measures and the government is expected to further boost the economy. Order book for industrial segment dropped QoQ to RM2.4bn (from 2.9bn) as at end 3QFY20.

Motor. China motor demand was affected by Covid-19 during 3QFY20, but management has seen strong recovery from April onwards since China has started easing lockdown measures by end March. On the other hand, motor demand in other markets i.e. ASEAN and Australasia are expected to remain relatively muted in the near term. Sime Darby is expected to recognise RM120m dividend income (received in May) from BMW Malaysia in upcoming 4QFY20.

Forecast. Unchanged as the Results Were Inline.

Maintain BUY, TP: RM2.25. We maintain BUY recommendation with higher TP of RM2.25 (from RM2.00), based on lower 10% (from 20%) discount to SOP of RM2.50, as we believe earnings in 3QFY20 to have bottomed. Sime Darby will continue to leverage on Australia’s mining sector to sustain profits in the near term while riding on the recovery of China market, which may cushion the short term negative impact of Covid-19. We also expect a good dividend yield of 5% for the year.

Source: Hong Leong Investment Bank Research - 28 May 2020