Sime Darby (SIME) reported a higher 9M18 core PBIT of RM788m (+38.7% yoy), driven by higher earnings across all business segments. However, its core net profit of RM523m (+21% yoy) fell short of our expectations due to a higher effective tax rate. Overall, we remain positive on SIME’s long-term prospects, backed by its strong global positioning within the motor (2nd largest BMW dealership globally) and industrial business (world’s 3rd largest Caterpillar dealer) as well as steady contribution from the healthcare segment. Reaffirm BUY.

All Segments on Fire, 9M18 Core PBIT Grew 38.7% Yoy

The Industrial segment remained the star performer in 9M18: core PBIT (profit before interest and tax) expanded 62.2% to RM305m on higher deliveries of equipment and product support sales from Australia (9M18 PBIT +137%) and China (9M18 +68.3%). Industrial segment’s orderbook amounted to RM2.3b (+67.6%) as at Mar18. Healthcare segment continued to grow steadily: core PBIT grew 54% to RM43m, attributable to higher profit from the Malaysian operations. Motor segment’s core PBIT also improved by 14.8% on higher sales volume and PBIT margins (+0.9ppt to 2.8%) on higher contribution from China and Hong Kong.

However, 9M18 Core Net Profit Came in Short Due to High Tax

Operationally, the results were broadly inline with our expectation – 9M18 core PBIT accounts for 77% of our FY18E forecast. However, core net profit was below our expectations due to high tax rate of 30%. Nonetheless, the 9M18 core net profit rose by 21% yoy in tandem with earnings growth across all business segments.

Maintain BUY With a Lower Price Target of RM3.29

We made some adjustments to our 2018-20E EPS, assuming a higher effective tax rate of 25-27%. In tandem with our earnings cut, we lowered our 12-month price target to RM3.29 (from RM3.31). Maintain BUY. Although its current valuation of 22x FY19E PER is above peer average, we believe SIME deserves a premium against its peers (mainly local auto players), in view of its solid track record and position as a top global auto and heavy equipment player. Potential re-rating catalysts include disposal of its logistics division or Malaysian Vision Valley land.

Source: Affin Hwang Research - 28 May 2018