Sime Darby’s 1QFY21 core PATMI of RM261m (-42.6% QoQ, -15.0% YoY) was within HLIB’s expectation (22.4%) and consensus (23.6%). Motor segment showed a strong rebound as countries eased down lockdown measures and implemented stimulus, while industrial segment saw some weakness due to Australia mining segment being affected by lower coal price and China’s unofficial import ban policy. We maintain BUY recommendation with unchanged TP: RM2.68 based on 10% discount to SOP: RM2.98. We expect Sime to continue leveraging on Australia’s mining sector while China market has experienced a strong recovery since April.

Within expectations. Core PATMI came in at RM261m for 1QFY21 (-42.6% QoQ, - 15.0% YoY), which was within HLIB’s FY21 forecast (22.4%) and consensus (23.6%). Australia mining sector has shown some weakness, which was partially offset by strong rebound in motor segments across the board especially in China.

Dividend. None.

QoQ. Core PATMI declined 42.6% YoY, attributed to RM120m annual dividend income recognised in the preceding quarter along with lower contribution from Australia mining equipment and parts revenue (decline in coal prices and slowdown of imports from China), as well as higher effective tax expenses for the quarter.

YoY. Core PATMI declined 15.0% YoY, mainly due to lower contribution from Australia mining segment. The decline was partially offset by strong rebound in overall motor sales and industrial segment in China (higher demand for construction equipment for infrastructure projects).

Industrial. Australia mining sector has been affected by the drop in coking coal price, as well as the lower coal export following China’s unofficial ban on Australian coal supply. On the brighter side, demand from China construction sector has seen strong recoveries following government’s push for infrastructure projects to revive the economy. Management guided the demand for mining equipment in Australia will stay resilient (as there is still no major cancellation of orders from coal miners) while various stimulus measures have started to be implemented in China and expects Malaysia to follow-suit with the revival of several major infrastructure projects. Order book for industrial segment has remained stable with slight growth QoQ to RM2.26bn (from RM2.22bn) as at end 1QFY21.

Motor. China motor demand rebounded strongly post government’s easing lockdown measures since April. Similarly, Malaysia market is expected to remain strong driven by SST exemptions until Dec 2020. Other markets have also seen strong rebound as consumers opted for personal mode of transportation (vs public modes). Upcoming attractive new launch include new BMW 4 series and iX3 in China market.

Forecast. Following update on annual report, we make minor adjustment to earnings for FY20 (-1.2%) and FY21 (-1.4%), and introduce FY22 earnings at RM1.2bn.

Maintain BUY, TP: RM2.68. We maintain BUY recommendation with unchanged TP of RM2.68, based on unchanged 10% discount to SOP of RM2.98, as we expect Sime Darby will continue to leverage on Australia’s mining sector and recovery of China market to sustain earnings. We also expect a continued decent dividend yield of 4.1% for the year.

Source: Hong Leong Investment Bank Research - 27 Nov 2020