Sime Darby (Sime)’s 1QFY19 core net profit of RM193m (-30.1% qoq, +80.4% yoy) came in within expectations, delivering 22% and 24% of our and consensus full year estimates. We reduce our 12-month target price to RM2.70 (from RM3.55) to better reflect the weakened valuations multiples arising from the ongoing trade war. Reiterate BUY.

Sime’s Star Performer, Industrial May Take a Breather in 2QFY19

Sime’s industrial division continued to perform remarkably well in 1QFY19: core PBIT (profit before interest and tax) climbed more than twofold to RM179m on higher equipment deliveries to the mining and construction sectors from Australasia and higher core PBIT margins (+2.8 ppts to 5.6%). Despite an ample RM2.58bn (+8.4% yoy, -6.2% qoq) order book as at Sept 2018, we believe that the strong earnings cycle in the industrial division may see some weakness in 2QFY19 after a recent article revealed that outlook for 4QCY18 thermal coal market seems bleak as China tightens restrictions on coal imports for the remaining 2018.

Motors Succumbed to Heavy Discounting and Weak Sentiments

Similar to other local auto players, Sime clocked in higher vehicles sales from the zero-rated goods and services tax period in Malaysia, lifting overall 1QFY19 revenue by 8% yoy to RM5.5bn. In spite of that, 1QFY19 core PBIT declined by 23.4% yoy to RM105m on lower core PBIT margins (-0.8 ppts to 1.9%), affected by competitive discounting in the Chinese market. While we remain positive of the all-new BMW 3 series, likely to be launch in 1QCY19 (or 3QFY19), we believe the ongoing trade tensions may affect the appetite for Chinese spending on big-ticket items in the near-term.

Healthcare Pushes On; Possible Growth Through Acquisition

1QFY19 core PBIT from the healthcare segment grew by 25% to RM15m in tandem with the higher revenue from Malaysia and Indonesia operations. Although the contribution is relatively small within the Group (5% of 1QFY19 PBIT), we believe the healthcare segment has the potential to grow into a core division, inorganically, considering Sime is hunting for potential acquisitions within the Asia-Pacific region within 4-5 years period.Logistics saw lower throughput, undergoing divestment talks

Elsewhere, the logistics division saw a 38.9% decline in 1QFY19 core PBIT on lower throughput (-14.9% yoy to 7.0m MT), adversely affected by severe weather conditions. Management guided that they are currently in talks with the Chinese government and several firms to dispose the ports business.

Maintain BUY With Lower TP of RM2.70

We maintain our earnings forecast but lower our 12-month target price to RM2.70 (from RM3.55), re-benchmarking our SOP valuation multiples to the respective peers (refer Fig 3) to better reflect the weakened valuations arising from the ongoing trade war. Although the valuations of 19x FY19E PER is above peer average of 14x, we believe the premium is warranted in view of its solid track record and position as a top global auto and heavy equipment player.

Key Risks

Key upside/downside risks include: 1) competition in respective divisions, 2) susceptibility to an economic slowdown, and 3) local regulatory risks.

Source: Affin Hwang Research - 22 Nov 2018