Sime’s 4QFY22 core PATMI RM470m (+83.6% QoQ, +27.0% YoY) and FY22 core PATMI RM1.3bn (+1.6% YoY), were above HLIB’s expectation (117.3%) and consensus (116.0%), driven by strong rebound of Australia industrial segment. We expect Sime Darby to continue riding on its Industrial segment into FY23, underpinned by the record RM4.4bn orderbook. Declared 2nd interim dividend 7.5 sen/share (ex-date: 7 Sep 2022). We maintain our BUY recommendation with a higher TP: RM2.76 (from RM2.60), based on 10% discount to SOP of RM3.07.

Above expectations. Core PATMI came in at RM470m for 4QFY22 (+83.6% QoQ, +27.0% YoY) and RM1.3bn for FY22 (+1.6% YoY). We deem the result above HLIB’s FY22 forecast (117.3%) and consensus (116.0%), mainly driven by stronger than expected contributions from Australia industrial segment as well as now discontinued Wei Fang logistic segment (subject to disposal exercise in FY23).

Dividend. Declared a second interim dividend of 7.5 sen/share (ex-date: 7 Sep 2022). Total dividend for FY22 would be 11.5 sen/share.

QoQ. Core PATMI improved +83.6% to RM470m, due to : (i) rebound of Australia Industrial segment, as more prime equipment was delivered and demand for maintenance and parts has picked up again as well as normalisation of margins for parts inventory (after being affected by unfavourable forex costing); and (ii) higher contribution from Motors segment on RM48m dividend income from BMW Malaysia.

YoY. Core PATMI improved +27.0%, mainly on stronger contribution of Industrial segment from Australia on higher sales volume and aftersales maintenance activities.

YTD. Core PATMI was relatively flattish +1.6%, as the lower contribution from Industrial (deferred maintenance schedule and unfavourable costing of parts) and Motors (affected by Covid lockdown and supply chain issue) were offset by higher contribution from Healthcare (last year was affected by higher tax) and Logistic (now categorised as discontinued business) as well as lower effective tax rate.

Industrial. Expect earnings to sustain in FY23, underpinned by the record high order book of RM4.4bn. Majority of the order book is anchored by Australia mining sector due to the continued highly profitable coal prices, while margins are expected remain strong as management has seen pick-up in the demand for maintenance and overhaul services, while margins normalise on the costing of parts for the year. Demand for construction equipment has also picked up in Australia, Malaysia and Singapore, while China market is expected to remain weak in FY23.

Motors. The ongoing Russia-Ukraine war and China’s zero Covid-19 policy continues to affect global supply chain. China has seen some slowdown in new car orders with current order backlog worth of 1.5 months. Nevertheless demand for new cars remained strong across other geographical segments with order backlog of up to 4 months. Management expects supply chain to improve in FY23, resulting to higher sales delivery as well as higher aftersales and ancillary services.

Forecast. We have adjusted earnings for FY23-24f by +15.4% and 2.5% respectively.

Maintain BUY, TP: RM2.76. We maintain BUY recommendation with a higher TP: RM2.76 (from RM2.60), based on unchanged 10% discount to SOP of RM3.07. Sime Darby will continue to leverage onto the strong momentum of its Industrial segment, driven by mining in Australia and construction in Malaysia, Singapore and Australia in FY23. We also expect a continued decent dividend yield of 7.0% for the financial year, following complete disposal of Weifang Ports.

Source: Hong Leong Investment Bank Research - 18 Aug 2022