Sime’s 2QFY22 core PATMI RM370m (+72.9% QoQ, +8.8% YoY) and 1HFY22 core PATMI RM584m (-7.4% YoY), were in line with HLIB’s expectation (52.3%) and consensus (47.4%). Overall industrial segment remain strong, driven by Australia market on the high commodity prices. Motor segment is expected to sustain overall on high margins. We maintain BUY recommendation with unchanged TP: RM2.60, based on 10% discount to SOP of RM2.89. We expect Sime to continue leveraging on Australia’s strengthening mining sector and overall robust motor segment in FY22.

Within expectations. Core PATMI came in at RM370m for 2QFY22 (+72.9% QoQ, +8.8% YoY) and RM584m for 1HFY22 (-7.4% YoY). We deem the result within HLIB’s FY22 forecast (52.3%) and consensus (47.4%). Earnings are expected to sustain in 2HFY22, with strong orderbook from Industrial and Motor segments.

Dividend. Declared first interim dividend of 4 sen/share (ex date: 25 April 2022).

QoQ. Core PATMI improved +72.9% to RM370m, due to a combination of: (i) stronger margin of Industrial segment from Australia, Malaysia and China; and (ii) stronger margin of Motor segment across all of the group’s geographical operations.

YoY. Core PATMI improved +8.8%, mainly due to lower effective tax during the quarter.

YTD. Core PATMI declined -7.4%, due to lower contribution from Industrial segment (affected by forex costing and increasing competitive China market) and Motor segment (lower car sales volume, affected by supply chain issue, which was partially offset by improving margins due to lower discounts offered).

Industrial. Demand from Australia mining sector remains robust driven by the recent surge in commodity prices. Order book for industrial segment surged to record high of RM4.0bn (from RM3.3bn) as at end 2QFY22. Expect Australia margins to continue normalising in 2HFY22 after being affected by weakening currency movement in 1HFY22. China market is expected to improve in 2HFY22 mainly due to stronger seasonality effect.

Motor. Despite lower sales volume (affected by global supply chain), the segment remains strong with healthy margins across all geographical locations on lower discounts and promotions, as well higher contribution from Malaysia Inokom subsidiary. Demand remained strong with order backlog of 15k units. Management expects the current shortage situation to improve in 2022 and to only fully recover in 2023. More EVs will be introduced with ongoing governments’ incentives while infrastructure is being developed.

ESG. Management has revealed their ESG framework, with targets of: (i) 30% reduction of emission by 2030 (scope 1 and 2 only); (ii) minimum RM250m investments in ESG innovation by 2025; and (iii) > 50% products in portfolio by 2025 are more energy efficient.

Forecast. Unchanged.

Maintain BUY, TP: RM2.60. We maintain BUY recommendation with an unchanged TP: RM2.60, based on unchanged 10% discount to SOP of RM2.89. We expect Sime Darby to continue leveraging on Australia’s mining sector and sustained overall automotive segment in FY22. We also expect a continued decent dividend yield of 5.3% for the financial y

Source: Hong Leong Investment Bank Research - 17 Feb 2022