Sime Darby’s 2QFY21 core PATMI of RM310m (+18.8% QoQ, +2.6% YoY) and 1HFY21 of RM571m (-6.2% YoY) were within HLIB’s expectation (49.6%) and consensus (52.0%). Motor segment continued to perform strongly as countries eased down lockdown measures and implemented stimulus, offsetting the weakness in Australia mining sector, being affected by lower coal price and China’s alleged import ban policy. We maintain BUY recommendation with unchanged TP of RM2.68 based on 10% discount to SOP of RM2.98. We expect Sime to continue leverage on Australia’s mining sector (despite the temporary weakness) while China market has experienced a strong recovery since April.

Within expectations. Core PATMI came in at RM310m for 2QFY21 (+18.8% QoQ, +2.6% YoY) and RM571m for 1HFY21 (-6.2% YoY), which was within HLIB’s FY21 forecast (49.6%) and consensus (52.0%). EIs for 1HFY21 include RM272m net disposal gain on Tesco (2QFY20) and RM12m impairment writebacks on E&O.

Dividend. Declared an interim dividend of 2 sen/share and a special dividend of 4 sen/share (ex-Date: 23 April 2021).

QoQ. Core PATMI improved 18.6%, driven by higher contribution from Industrial segment (driven by higher demand in China market following stimulus spending on infrastructure investment and sustained Australia mining market) and Motor segment (driven by sales rebound in Singapore market and sustained sales in China market with improved margins).

YoY. Core PATMI improved 2.6% YoY, mainly driven by stronger contribution from Motor segment with increased sales and improved margins across all markets (especially China), which was partially offset by weaker contribution from Australia mining sector.

YoY. Core PATMI declined -6.2% YoY, due to slower sales in Australia mining sector, which was partially offset by strong sales in China construction sector and rebound in Motor segment with stronger sales and margins across the markets.

Industrial. Australia mining sector has weakened, affected by the drop in coking coal price and China’s alleged ban on Australian coal imports. Nevertheless, the group has received increased order book in Australia. On the brighter side, equipment demand in China, Malaysia, Singapore and New Zealand are expected to improve following the implementation of stimulus plans to boost the economy. Order book for industrial segment has remained stable with slight growth QoQ to RM2.67bn from RM2.28bn) as at end 2QFY21).

Motor. China motor segment rebounded strongly post government’s easing lockdown measures since April 2020, with strong demand for luxury cars. Similarly, Malaysia market is expected to remain strong driven by SST exemptions until Jun 2021. Other markets have also seen strong rebound as consumers opted for personal mode of transportation (vs public modes) as well as recovery in consumer sentiment following vaccination programs and government stimulus plans.

Forecast. Unchanged.

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 to continue leverage on sustaining Australia’s mining sector and recovery of China market. We also expect a continued decent dividend yield of 6.4% for the year.

Source: Hong Leong Investment Bank Research - 26 Feb 2021