Sime Darby (Sime) reported a good set of results – 9MFY19 core net profit grew by 47% yoy to RM769m attributable to stronger contributions from the industrial division and healthcare segments, offset by weaker performance from its Motors and Logistics segments. On the whole, 9MFY19 results was within ours but above consensus - 74% and 87% of respective full year forecast. Going forward, we think that fragile coal prices may irritate mining capex spending (Industrial: 62% of 9MFY19 core PBIT), a potential dampener to FY20-21E earnings growth. Maintain HOLD.

9MFY19 Core PBIT Grew 27% Yoy, Led by Industrials and Healthcare

The Industrials segment remained the star performer in 9MFY19: core PBIT (profit before interest and tax) doubled to RM616m, driven by higher equipment deliveries and product support sales to Australia (+163% yoy) and China (+27% yoy). The current orderbook of RM2.6bn as at end of Mar 2019 (+10% yoy) should support near term earnings. In addition, the recent election victory for Australia’s pro-coal ruling coalition bodes well for Adani Group’s long-delayed Carmichael coal mine project, which we think would act as a key re-rating catalyst for the stock. However, the fragile long-term outlook for coking coal and thermal coal, in our view, remains a huge concern to industrial’s earnings growth moving forward. Excluding the tax adjustment of RM6m made in 9MFY18, Healthcare segment 9MFY19 core PBIT grew by 13.5% yoy to RM42m on higher contribution from Malaysia and Indonesia operations.

…offset by Lower Contribution From Motors and Logistics

Despite recording higher revenue (+5% yoy), Motor’s 9MFY19 core PBIT fell by 18% yoy to RM336m due to lower margins in China (- 1.2ppts to 1.6%), impacted by the competitive discounting. We believe the launch of BMW’s best-selling model, the all-new BMW 3 Series and other upcoming model launches (ie. BMW X7, Hyundai Santa Fe and Porsche 911) will likely boost sales/margins in the coming quarters. Meanwhile, the lower throughput at China ports (-8% yoy to 22.3m MT) also saw the logistics division 9MFY19 core PBIT decline by 39% yoy to RM37m.

Maintain HOLD With Unchanged Target Price of RM2.40

We are keeping our forecast unchanged as the 9MFY19 results is inline with our expectations. We maintain our HOLD rating with an unchanged SOTP TP of RM2.40. At 18x FY20E PER, valuations looks fair.

Source: Affin Hwang Research - 30 May 2019