Sime Darby’s 4QFY20 core PATMI of RM455m (+222.7% QoQ, +28.2% YoY) and FY20 of RM1.2bn (+12.7% YoY) was above HLIB’s expectation (120.0%) and consensus (129.8%), driven by strong recovery in China market as well as growth in Australia mining sector. We reiterate BUY recommendation with higher TP: RM2.68 (from RM2.55), based on 10% discount to SOP: RM2.96. We expect Sime to continue leveraging on Australia’s mining sector while China market has experienced strong recovery since April, cushioning the negative impact of Covid-19 outbreak in other markets.

Above expectations. Core PATMI came in at RM455m for 4QFY20 (+222.7% QoQ, +28.2% YoY), pushing FY20 to record RM1.2bn (+12.7% YoY), above HLIB’s FY20 forecast (120.0%) and consensus (129.8%). The result was driven by continued growth of Australia mining market, and strong recovery in China market for both industrial and motors. In 4QFY20, Sime received the usual dividend from BMW investments of RM120m as compared to RM135m in 4QFY19.

Dividend. Declared a second interim dividend of 7sen/share and a special dividend of 1sen/share (ex-date: 2 Oct 2020). Total dividend for the financial year would be 10sen/share, translating into a 4.6% dividend yield.

QoQ & YoY. Core PATMI improved by +222.7% QoQ and +28.2% YoY, mainly driven by strong rebound in China market for both industrial segment (driven by construction and infrastructure) and motor segment (opening of economy post country wide lockdown measures to control Covid-19 during earlier of 2020). Australia mining sector continued to sustain during the quarter.

YTD. Despite the impact of Covid-19 during 2HFY20, the group managed to record FY20 earnings growth of 12.7% YoY, mainly due to stronger demand for Australia mining equipment during the financial year, while China experienced strong rebound in demand for construction equipment and motor sales in 4QFY20, compensating the loss of sales in 3QFY20.

Industrial. The impact of Covid-19 outbreak is not material towards Australia mining sector as it is considered an “essential service”, while construction sector has seen strong recoveries in China market, as the government pushed forward to revive the economy. Management guided the demand for mining equipment in Australia has remained resilient while various stimulus measures have started to be implemented in China and expect other countries to follow-suit. Order book for industrial segment dropped QoQ to RM2.2bn (from RM2.4bn) as at end 3QFY20.

Motor. China motor demand rebounded strongly post government start easing lockdown measures in April. Similarly, Malaysia market is expected to enjoy strong rebound following government’s implementation of SST exemptions and PENJANA stimulus for Jun-Dec 2020 period. On the other hand, motor demand in other markets i.e. ASEAN and Australasia are expected to remain relatively muted in the near term. Upcoming attractive new launch include new BMW 5 series in China market.

Forecast. Increased FY21 earnings by 8.2% and FY22 earnings by 5.2%.

Maintain BUY, TP: RM2.68. We maintain BUY recommendation with higher TP of RM2.68 (from RM2.55), based on unchanged 10% discount to SOP of RM2.96, as we expect 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 continued good dividend yield of 4.6% for the year.

Source: Hong Leong Investment Bank Research - 28 Aug 2020