Sime Darby (Sime) reported a good set of results – FY19 core net profit rose by 37% yoy to RM1.1bn, driven by higher contribution from the industrial division. Overall, the earnings were in line with street expectations but above ours. However, we believe the strong FY19 earnings may not last, as Sime’s regional exposure makes it susceptible to an economic slowdown. Hence, we trim our SOTPbased TP to RM2.14 (from RM2.40) and reiterate our HOLD rating.

Industrial Segment Remained the Star Performer in FY19…

Industrial’s FY19 core PBIT (profit before interest and tax) almost doubled to RM817m, driven by higher equipment deliveries and product support sales to the Australia mining sector (+160% yoy to RM545m) and China infrastructure sector (+17% yoy to RM188m). The lower order book of RM2.4bn (from June-18: RM2.7bn) and softer coal prices suggest the strong industrial mining cycle has slowly waned.

…while the Other Key Segments Frustrate

Core PBIT of the motors division fell by 11% yoy to RM616m due to lower contribution from Singapore and Hong Kong, partly mitigated by higher contribution from Malaysia on a tax holiday boost. Despite the intensifying competition in key markets, we think the new model launches (ie. BMW z4, 2019 Mini, BMW X3M & X4M and Porsche 911 Cabriolet) will likely spur excitement in the coming months. Meanwhile, the logistic division’s core PBIT dropped by 42% yoy to RM43m, following the disposal of Weifang Water, lower throughput at Jining ports (-7% yoy to 30m MT general cargo amid trade war) and forex losses. The healthcare division’s core PBIT was also lower by 14% yoy to RM49m due to a higher tax expense.

FY19 Results Were Above Our Expectations; DPS of 10 Sen

All in, Sime’s earnings were in line with street expectations but beat ours at 102% and 110% of the respective full-year forecasts. The variance was due to the stronger-than-expected performance from the industrial division. Nonetheless, we believe the strong earnings from the industrial segment is not sustainable, given the slower global growth, its lower orderbook and softer coal prices. Sime declared a second interim dividend of 7sen and a special dividend of 1sen, bringing FY19 dividends to 10sen (FY18 dividends: 8 sen).

Maintain HOLD With Lower 12-month TP of RM2.14

We are keeping our earnings forecasts, expecting Sime’s FY20E core earnings to slip by 17% yoy, as we believe the prolonged US-China trade war may negatively impact Sime’s regional businesses. We are lowering our SOTP-derived price target to RM2.14 (from RM2.40; Fig 3) based on lower valuation multiples for its industrial and motor businesses, in view of the weakened global economic outlook. At a 16x FY20E PER, the valuation looks fair. Maintain HOLD.

Risks to Our Call

Key upside risks include the disposal of its logistics division and the Malaysian Vision Valley land as well as the approval for the opening of the Adani coal mine. Key downside risks include competition in the respective divisions, an economic slowdown, and local regulatory risks.

Source: Affin Hwang Research - 28 Aug 2019