Sime’s 2QFY23 core PATMI RM260m (-1.5% QoQ, -29.7% YoY) and 1HFY23 RM524m (-10.3%% YoY), was within both HLIB’s expectation (45.7%) and consensus (45.8%). We expect Sime Darby to continue leveraging on its Industrial segment in FY23, underpinned by its high RM4.7bn order book. On the other hand, Motors segment may remain dismal, dragged by weak China market. We maintain our BUY recommendation with an unchanged TP: RM2.70, based on 10% discount to SOP of RM2.99.

Within expectations. Core PATMI came in at RM260m for 2QFY23 (-1.5% QoQ; -29.7% YoY) and RM524m for 1HFY23 (-10.3% YoY). We deem the result within HLIB’s FY23 forecast (45.7%) and consensus (45.8%). EIs for 1HFY23 include RM124m net disposal gain on Weifang Ports, RM25m net forex gain and -RM90m on net impairments.

Dividend. Declared 3 sen/share interim dividend (ex-date: 9 March 2023).

QoQ. Core PATMI was relatively flattish at -1.5% to RM260m, as the slight stronger Industrial segment (improvements from Malaysia and China operations) was offset by the weaker Motors segment (worsened China margins) as well as higher tax expenses.

YoY. Despite higher revenue, core PATMI declined -29.7%, mainly dragged by margin decline for Motors segment (especially for China market, affected by lockdown and discounting) as well as higher net finance costs on increased borrowings and interest rates.

YTD. Similarly, core PATMI declined -10.3%, dragged by weakening performance of China Motors segment and higher net finance costs, which were partially offset by the stronger contribution of Industrial segment from Australia on higher equipment sales volume and aftersales maintenance activities.

Industrial. Mainly supported by the high order book of RM4.7bn. 68.8% of the order book is attributed to Australia market (mainly mining sector) due to the continued highly profitable coal prices, while margins are expected to sustain as management has seen pick-up in the demand for maintenance and overhaul services. China has also removed its import ban on Australia coal. Demand for construction equipment has also improved in Malaysia and China markets as seen in the increase in the latest order book.

Motors. China market may continue to suffer from deteriorated margin, affected by the shift in consumer spending away from physical goods following reopening of its border and relaxation of Covid-19 policies, while Singapore is affected by higher COE and Australasia by interest rate hike and inflationary pressures. Nevertheless, we expect some growth in Malaysia and Thailand markets. The group will continue to leverage onto the growing demand for EV related brands, models and infrastructures.

Forecast. Unchanged.

Maintain BUY, TP: RM2.70. We maintain BUY recommendation with an unchanged TP: RM2.70, based on unchanged 10% discount to SOP of RM2.99. Sime Darby will continue to leverage onto the strong momentum of its Industrial segment, driven by mining in Australia in FY23. We also expect a continued decent dividend yield of 5.2- 6.1% for FY23-25f, following cash flow proceeds from the disposal of Weifang Ports, Jining Ports and plots of MVV lands.

Source: Hong Leong Investment Bank Research - 24 Feb 2023