We are downgrading Sime Darby to HOLD (from BUY) with a lower TP of RM2.40 (from RM2.70) as we turn cautious on its industrial segment’s earnings growth, which is expected to face headwinds in the year ahead due to fragile coal prices. At 17.4x FY20E PER, Sime Darby’s valuation looks fair.

Industrial: Revenue and Margins Under Pressure on Weaker Coal Prices

Badged as the third largest Caterpillar (CAT) dealer globally, Sime Darby Industrial’s near term earnings will be supported by its existing orderbook of RM2.5bn. Over the longer term, demand for heavy equipment could be a shade below previous year’s achievements due to weaker contribution from Australasia (61% of Industrial 1HFY19 PBIT) on softer coal prices; ongoing price competition and a firmer USD may erode margins.

Motors: New Models Spur Volume Growth; Margin Squeeze to Subside

Sime Darby Motors, the second largest BMW dealer globally, will continue to leverage on BMW’s product upcycle and fresh line-ups from Hyundai, Ford and Porsche. We believe the ongoing margin compression should ease gradually, benefitting from the aggressive product refreshment initiatives, improving Ringgit and possibly some assistance may arrive from BMW (via rebate mechanism). A prolonged trade war may however dampen sentiments and negatively impact earnings outlook.

Healthcare to turn core; disposing logistics and other non-core assets

We expect Ramsay Sime Darby Healthcare, one of the leading premium hospital operators in Malaysia and Indonesia, to benefit from the robust long-term healthcare demand and record decent earnings growth over FY19-21E. As for the logistics division, the divestment will take longerthan-expected, due to the regulatory constraints from the Chinese government. The Group’s Malaysian Vision Valley also shares a similar fate due to the KL-SG High Speed Rail project uncertainty.

Downgrade to HOLD With Lower Target Price of RM2.40

We downgrade Sime Darby to HOLD (from BUY) as we believe FY19E is likely to mark the peak earnings growth phase of the industrial cycle, cushioned by improving outlook from the motor division. As such, we cut our FY20-21E EPS by 6-12%, rolled forward our valuation horizon and trim our SOTP to RM2.40 (from RM2.70). Key re-rerating catalysts include possible disposal of its logistics division or its Malaysian Vision Valley (MVV) land.

Source: Affin Hwang Research - 8 May 2019