Sime Darby (Sime) reported a good set of results – 1QFY20 core net profit of RM278m (+44% yoy) was in line with street expectation but above ours, accounting for 29% and 31% of the consensus and our full-year estimates. The earnings surprise was due to the higher-thanexpected contribution from the industrial division. While we raise our FY20 EPS forecast by 12% on the strong 1QFY20 results, Sime’s long-term prospects look shaky, in view of its susceptibility to an economic slowdown. Reiterate HOLD with a higher TP of RM2.23.

1QFY20 Core PBIT of Industrial, Sime’s Star Performer, Rose 46% Yoy

Sime’s industrial division continued to perform well in 1QFY20: core PBIT (profit before interest and tax) came in at RM264m (+46% yoy; +31% qoq) on higher equipment deliveries to Australasia’s mining (+40% yoy to RM192m) and China’s construction sectors (+20% yoy to RM42m). The industrial order book of RM2.5bn (+4% yoy; as at Sept-19) support nearterm earnings, but we think its long-term prospects could be dampened by weaker coal prices and China’s restriction on Australian coal.

Motor’s 1QFY20 Core PBIT Improved on Lower Discounting

Although the motor division’s 1QFY20 revenue declined by 2% yoy to RM5.4bn, its core PBIT improved by 28% yoy to RM134m, on improved margins (+0.6ppts to PBIT margin of 2.5%), as a result of reduced discounting in China (China’s 1QFY20 core PBIT almost tripled to RM73m). With more new models (better margin sales mix) in FY20-21E, we think motor margins should recover gradually moving forward.

Flat Contribution From Healthcare; Weaker Contribution From Logistics

Meanwhile, the logistics division’s core PBIT dropped by 46% yoy to RM6m, due to the 1QFY20 LBIT from JVs of RM6m (1QFY19 PBIT of RM1m). Excluding the disposed Weifang Water and JV losses, the ports sub-division recorded a core PBIT of RM15m (+88% yoy) from higher bulk cargo throughput at Weifang port (+4% yoy to 7.3m MT). Elsewhere, Sime’s Healthcare Division’s 1QFY20 Core PBIT Was Flat at RM15m.

Maintain HOLD With a Higher TP of RM2.23

We raise our FY20 EPS estimate by 12%, after imputing the strong 1QFY20 results; we also tweak the FY21-22 EPS estimates by 1-2% on fine-tuning after the release of Sime’s annual report. In tandem, we raise our SOTP-derived price target to RM2.23 (from RM2.14; Fig 3). At a 17x FY20E PER, the valuation looks fair. Reaffirm 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 - 27 Nov 2019