Sime Darby (SIME) reported a modest set of results (6M18 core PBT fell 1% yoy to RM544m). Excluding a transitory drag from its Vietnam Motor operation, most business segments delivered revenue and earnings growth. Notable mentions are the industrial (6M18 core PBIT +115% yoy) and healthcare businesses (6M18 PBIT +32% yoy). Operationally, the results are broadly within our expectations. Maintain HOLD. While we are positive on SIME business outlook, its rich valuation of 20.5x FY19E PER has largely priced-in the positives.

Industrial Is the Star Performer; Vietnam Motor a Transitory Drag

Industrial segment was the star performer in 6M18: core PBIT (profit before interest and tax) grew by 115% to RM228m on higher demand from the construction and mining sectors in Australia and China. Healthcare continued to perform: 6M18 PBIT grew by 32% yoy to RM25m, driven by higher revenue from the Malaysian operations. Vietnam motor operation reported RM184m losses in 6M18 (vs PBIT of RM10m in 6M17). We understand that SIME plans to dispose its Vietnam business and BMW inventories following the appointment of a competitor as the new BMW / MINI Importer for the Vietnam market. Excluding its Vietnam operation and gain on disposal, Motor’s 6M18 core PBIT grew by 19% yoy on higher profit from China and Hong Kong operations.

Core pretax profit is inline; net profit fell short due to high taxation

Operationally, the results are broadly within our expectations – 6M18 core pretax profit accounts for 50% of our full year forecast. However, its core net profit fell short of our expectations due to a higher than expected effective tax rate of 30%. Elsewhere, SIME’s 6M18 results are sharply below Bloomberg consensus forecasts that has yet to fully adjust for the recently completed spinoff exercise. Management has declared an interim dividend of 2 sen.

Maintain HOLD With An Unchanged TP of RM3.05

We maintain our earnings forecast for now, pending further updates in today’s analyst briefing. Maintain HOLD. While we are positive on SIME’s business prospects, its rich valuation of 20.5x FY19E PER has largely priced-in the positives, we believe. Potential re-rating catalysts include disposal of its logistics division or Malaysian Vision Valley land. Downside risks are 1) competition in respective divisions, 2) susceptibility to an economic slowdown and 3) local regulatory risks.

Source: Affin Hwang Research - 23 Feb 2018