High-definition Identity

We raise our target price on Sime Darby to RM3.05 as we adjust our FY18-20 estimates and roll forward our valuation base year to FY19, we are downgrading our recommendation to HOLD from Buy based on valuation. Although we maintain our positive long-term view on SIME in view of its attractive new model launches, the revival of the mining sector in Australia, rapid infrastructure development in key markets, strong growth potential in Ramsay Sime Darby Healthcare and the unlocking of hidden gems in other assets within the Group, we believe these known positives have been priced in, following the 28.4% shareprice appreciation since the demerger.

Industrial: Vibrant Mining and Construction Activity to Spur Growth

Having endured the doldrums in 2014-16, earnings from Sime Darby Industrial (SDI), the third largest Caterpillar (CAT) dealer globally, is set to rebound in FY18-19E on 1) firmer commodity prices and 2) mega infrastructure projects and townships in the pipeline. SDI’s order book has ballooned to RM2.4bn, which is expected to keep it occupied until 1H19.

Motor: Expecting Stronger Automotive Earnings in FY18-19E

SIME’s motor division (No. 2 BMW dealer globally) should see higher revenue growth in FY19-20E, driven by BMW’s product upcycle and attractive model line-ups from other car marques.

Healthcare: Unearthing the Next Core Business

Robust long-term healthcare demand should continue to benefit Ramsay Sime Darby Healthcare (RSDH) - one of largest hospital operators in Malaysia (bed capacity accounts for 6.8% market share). We expect its ongoing cost rationalisation initiatives to foster earnings growth.

Downgrade to HOLD With a Higher Price Target of RM3.05

We raise our FY18-20E EPS by 11-56%, taking into consideration higher growth rate assumptions for all divisions under SIME. We roll forward our valuation base year to FY19E and raise our sum-of-parts (SOP) target price to RM3.05 from RM2.16 previously. Notwithstanding our positive view on SIME’s business prospects, we downgrade the stock to HOLD from Buy following a 28% share-price jump post-spinoff. At a 21x FY19E PER, valuation looks fair. Potential upward re-rating catalysts include possible disposal of its logistics division or its Malaysian Vision Valley (MVV) land. Key downside risks are 1) competition in respective divisions, 2) susceptibility to an economic slowdown and 3) local regulatory risks. This note marks a transfer of coverage.

Source: Affin Hwang Research - 19 Jan 2018