Sime Darby’s 3QFY21 core PATMI of RM264m (-16.2% QoQ, +80.8% YoY) and 9MFY21 of RM845m (+10.5% YoY) were within HLIB’s expectation (73.4%) and consensus (74.5%). The strong performance was mainly driven by strong contribution for both industrial and motor segments. We maintain BUY recommendation with unchanged TP of RM2.68 based on 10% discount to SOP of RM2.98. We expect Sime to continue leveraging 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 RM264m for 3QFY21 (-16.2% QoQ, +80.8% YoY) and RM845m for 9MFY21 (+10.5% YoY), which was within HLIB’s FY21 forecast (73.4%) and consensus (74.5%). EIs for 9MFY21 include RM272m net disposal gain on Tesco (2QFY21), RM33m impairment write backs on E&O (2Q- 3QFY21) and RM39m GST refund in Singapore (3QFY21).

Dividend. None.

QoQ. Core PATMI dropped 16.2%, following lower margin from industrial segment (following deteriorated product sales mix, competitive pricings in China and some write backs recognised in SPLQ) and lower group sales volume and margin of motor segment (due to timing recognition of incentives in China in SPLQ) while healthcare segment recorded loss for the quarter (due to recognition of deferred write down and dividend withholding tax)

YoY & YTD. Core PATMI improved 80.8% YoY and 10.5% YTD, mainly due to low base effect as SPLY was heavily affected by the early stage of Covid -19 and strict implementation of country lockdown measures (especially in China), affecting Motor segment and logistic segment.

Industrial. Australia mining sector has weakened, being affected by the drop in coking coal price and deteriorated China-Australia geopolitics. On the brighter side, the group has received strong new orders from Australia, as commodity prices surged in recent months while the government implemented its Economic Recovery Plan. Similarly, China market has been gaining traction given the government’s ongoing effort to boost the domestic economy. Management is confident of Malaysia and Singapore to improve due to anticipated major infrastructure and public projects. Order book for industrial segment has grown significantly QoQ to RM3.2bn (from RM2.7bn) as at end 3QFY21.

Motor. The segment has been somewhat affected by global supply issue of chips, resulting lower group sales volume in 3QFY21. Nevertheless, BMW has been prioritising supply to China market, benefitting the group. Malaysia market is expected to remain strong driven by SST exemptions until Jun 2021 (approached government to extend up to 31 Dec 2021). Management expects upcoming dividend from BMW Malaysia at c. RM100m.

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 leveraging on sustaining Australia’s mining sector and recovery of China market. We also expect a continued decent dividend yield of 6.1% for the year.

Source: Hong Leong Investment Bank Research - 27 May 2021