Sime Darby (Sime) reported another good set of results – 6MFY19 core net profit of RM543.0m (+55% yoy) was above our and consensus expectations, constituting 62% and 60% of the full-year forecasts. The variance was mainly due to a lower effective tax rate. Operationally, the results are broadly within our expectations. We remain positive on Sime, in view of the sustained demand for mining equipment in Australia for the industrial division and modest sales from the motors division. Reaffirm BUY.

6MFY19 Core PBIT Grew 15.4% Yoy, Led by Industrials and Healthcare

The industrials segment continued to perform in 6MFY19: core PBIT (profit before interest and tax) rose 52.6% to RM348m on higher deliveries of equipment to the mining and construction sector in Australia (6MFY19 PBIT +18% yoy). Management believes that the recent news on the China ban on coal imports from Australia is still at its preliminary stage. The Australian trade minister has acknowledged the unconfirmed and unsourced reports. In the medium term, earnings will likely be supported by its orderbook of RM2.5bn as at end Dec 2018 (+14% yoy). Elsewhere,

the healthcare division continued to grow: core PBIT increased 20% to RM30m, attributable to higher profit from Malaysia and Indonesia operations.

…while Motors and Logistics Took a Step Back

But, Motors’ 6MFY19 core PBIT shrank by 16.4% yoy to RM225m due to: (i) lower margins in China as a result of competitive discounting and (ii) lower sales and margins in Singapore. We believe the softening in the motors segment is temporary and the rich product pipeline will likely spur excitement moving into 3QFY19. The logistics division’s 6MFY19 core PBIT declined by 39.5% to RM43m on lower throughput, adversely affected by severe weather conditions.

6MFY19 Core Net Profit Came in Above Due to Lower Tax Rate

Operationally, results were broadly in line with our expectations – 6M FY19 core PBIT accounts for 47% of our FY19E forecast. However, core net profit was above expectations, attributed to the low tax rate of 10% on deferred tax credit recognised due to the change in Real Property Gains Tax (RPGT) rates for the Malaysian Vision Valley land. Sime has declared an interim dividend of 2 sen.

Maintain BUY With An Unchanged TP of RM2.70

We raise our FY19E EPS by 13% to incorporate the lower effective tax rate of 15% (from 25%). We reiterate our BUY rating on SIME with an unchanged SOTP-based TP of RM2.70. Although the 15.8x FY19E PER seems rich relative to the peer CY19E average of 14x (based on our estimates), 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 downside risks include: 1) competition in respective divisions, 2) susceptibility to an economic slowdown, and 3) local regulatory risks.

Source: Affin Hwang Research - 21 Feb 2019