Sime Darby’s 4QFY21 core PATMI of RM345m (+30.7% QoQ, -25.0% YoY) and FY21 of RM1.2bn (-2.9% YoY) were within HLIB’s expectation (103.9%) and consensus (100.3%). The strong performance was mainly driven by sustained 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 leverage on Australia’s strengthening mining sector and China’s robust motor segment into FY22.

Within expectations. Core PATMI came in at RM345m for 4QFY21 (+30.7% QoQ, -25.0% YoY), uplifting FY21 sum to RM1.2bn (-2.9% YoY), which was within HLIB’s FY21 forecast (103.9%) and consensus (100.3%). EIs for FY21 include RM272m net disposal gain on Tesco (2QFY21), RM33m impairment write backs on E&O (2Q- 3QFY21), RM39m GST refund in Singapore (3QFY21), RM38 gain in property disposal (4QFY21), RM89m impairments of leasehold land (4QFY21) and RM85m impairment on logistics (4QFY21).

Dividend. Declared 2nd interim div of 8 sen and 2nd special div of 1 sen (both ex date: 10 Sep 2021). Total dividend for FY21, amount to 15 sen (6.6% yield).

QoQ. Core PATMI improved 30.7%, mainly driven by RM113m dividend income from BMW Malaysia, recognised during the quarter, which partially offset by the higher effective tax expenses.

YoY/YTD. Core PATMI declined -25.0% YoY and marginally -2.9% YTD, mainly due to lower core margin of industrial segment (deteriorated product/service mix), higher inter-co expenses and higher effective tax rate (due to non-deductible expenses), which was partially offset by the improved contributions from motor segment (mainly from China market).

Industrial. Demand from Australia mining sector remained robust as coal mining operators has again started investing into sector, driven by the recent surge in coal commodity prices. Similarly, there is increasing demand for construction equipment across the countries of operation, as governments initiate stimulus plans on infrastructure spending as they reopen the economy and recover from the Covid-19 pandemic. Management expects demand from the mining segment to remain robust for the next 2-3 years as steel products (coking coal as major raw input) are needed for infrastructure construction. Order book for industrial segment continued to trend higher QoQ to RM3.3bn (from RM3.2bn) as at end 4QFY21.

Motor. The segment remained strong, driven by strong demand for automotive due to combination of changing consumption behaviour (especially in China) and recovery/stimulus plans by governments to spur the economies. Despite on-going concern on chip shortages, BMW has been prioritising supply to China market and currently supply is able to meet the high demand (with low inventory level), benefitting the group as well as improved margins. With regards to EV, management believes the market will still need 3-4 years to start adaption to the technology, but the group is starting discussion with various parties to explore opportunities in the segment.

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 RM2.97, as we expect Sime Darby to continue leverage Australia’s mining sector and recovery of China market into FY22. We also expect a continued decent dividend yield of 4.4% for the financial year (with potential special dividend upside).

Source: Hong Leong Investment Bank Research - 26 Aug 2021