Sime Darby (Sime) reported a good set of results – FY18 core PBIT grew 29% yoy to RM1,228m, driven by higher earnings across all business segments. The results were in line with our estimates but fell below the street’s expectations. We raise our FY19-20 EPS forecasts by 2-12%, taking into consideration the likely uptick in Australia’s mining sector and modest sales from new model launches in the coming quarters, and raise our TP to RM3.55 (from RM3.29). We reaffirm our BUY rating. We continue to like SIME for its solid track record and strong global position within the motor and industrial businesses as well as steady contribution from the healthcare segment.

All Segments Performed Well in FY18

The industrial division was the star performer in FY18: core PBIT (profit before interest and tax) jumped 72% to RM434m on improved contribution from equipment deliveries to both the mining and construction sectors in Australia and China. The healthcare division grew by 58% to RM57m on higher profit from Malaysia and additional tax expense adjustments in FY18. Contribution from the logistic division was also higher by 16% on higher port throughput, with general cargo throughput and container throughput increasing by 5% and 9% respectively. Excluding its Vietnam losses and other one-off items, the motor division’s contribution improved marginally by 3.4% due to higher core PBIT contribution from Hong Kong & Macau (+2% yoy) and Australia (+20% yoy), but partly offset by weaker Malaysia operations (-5.8% yoy).

FY18 Results in Line With Our Expectations, Bumper FY18 Dividends

All in, Sime’s results were within our expectations (99% of our FY18 forecast) but below the street’s (86% of estimate). Sime declared a 6sen dividend (both interim and special) for 4QFY18, bringing the DPS to 8sen (FY17: 23 sen, before the demerger exercise).

Results Briefing Takeaways – Cautious Optimism

I. Prospects for the industrial division remain good with stronger sales expected to continue from Australia’s mining sector, aided by higher commodity prices. We remain positive on SIME’s business prospects as we believe Sime Industrial is in the sweet spot of Australia’s mining cycle, and given the continued infrastructure spend in China. The order book as of June 2018 stood at RM2,747m (+94% yoy).

II. For Motors, Sime expects modest growth in core markets, with higher sales from new model launches in the coming quarters (ie. Lamborghini Urus, BMW 6 Series GT, BMW i8 Coupe, Jaguar Ftype). The highly anticipated launch of the all-new BMW 3 Series (scheduled for 3Q FY19) should lift sales as the model has historically been the top-selling model globally (~30% of BMW’s annual sales).

III. However, we believe the: 1) ongoing trade war between China and the United States as well as the hike in car prices after the reintroduction of the sales and service tax (SST) in Sept 18 and 2) stiffer competition may impact Motor’s growth in FY19.

IV. The BMW engine plant began operations in May 2018, with a production capacity of up to 10k engines/year, catering for the local and export markets.

V. Management guided that its 2019 capex will be between RM900- 950m (about 3% of FY19E revenue), mainly for the upgrading of motor showrooms across the Asia Pacific region.

VI. Sime continues to explore opportunities to monetise the logistics business in Shandong, China. Recall that Sime recently divested the Weifang water-management business for USD68m (or RM275m).

VII. While growing on the back of higher demand for private healthcare services, Ramsay Sime Darby Health Medical Centre also focuses on marketing initiatives to lift sales for underutilised hospitals (ie. Ara Damansara and Parkcity).

Raising FY19-20E EPS by 2-12%

We raise our FY19-20E EPS by 2-12% after incorporating: (i) higher growth rate assumptions for the industrial segment, but partly offset by the motors segment in view of the uncertainty from the SST price hike and China-US trade war, (ii) a higher annual capex, and (iii) a higher DPS of 8- 9 sen, based on a payout ratio of 65%.

Maintain BUY With a Higher TP of RM3.55

In tandem with our earnings forecast revisions, we maintain our BUY rating on SIME with an SOTP-based 12-month TP of RM3.55 (from RM3.29). Although its valuation of 20x FY19E PER is above the peer average, we believe the premium is warranted in view of its solid track record and position as a top auto and equipment player. Key downside risks are: 1) competition in respective divisions, 2) susceptibility to an economic slowdown, and 3) local regulatory risks.

Source: Affin Hwang Research - 3 Sept 2018