Sime Darby (Sime) reported a decent set of results – 6MFY20 core net profit of RM568m (+5% yoy) was above street and our expectations, constituting 55% and 57% of the full-year forecasts. The earnings surprise was mainly due to the higher-than-expected contribution from the industrial division. Despite the better 1HFY20 performance, Sime’s 2HFY20 prospects look challenging amid the Covid-19 outbreak. As such, we lower FY20-22 EPS forecasts by 2-6%, and lower our SOTP to RM2.00. Reaffirm HOLD.

6MFY20 Core PBIT Rose by 29% Yoy, Led by Top 3 Segments…

Sime’s Industrial Division Remained the Star Performer in 6MFY20: core PBIT (profit before interest and tax) came in at RM556m (+36% yoy) mainly due to higher equipment sales and product support to Australasia’s mining (+33% yoy) and China’s construction (+40% yoy) sectors. In addition, the motor division’s 6MFY20 core PBIT improved to RM277m (+23% yoy), thanks to reduced discounting in China (China’s 6MFY20 core PBIT more than doubled to RM163m). The healthcare division also continued to grow: core PBIT increased by 7% to RM32m from higher revenue from the Indonesia and Malaysia operations.

…but Chipped Off Slightly by Logistics Division

However, the logistics division’s 6MFY20 core PBIT fell by 50% yoy to RM13m, dampened by lower cargo throughput at the Weifang and Jining ports and a JV loss of RM12m. Notwithstanding the strong core PBIT growth, Sime’s 6MFY20 core net profit grew by a lower magnitude of 5% due to a higher effective tax rate. Sime has declared an interim dividend of 2 sen, similar to that in 2QFY19.

2HFY20 Prospects Look Challenging, Amid Covid-19 Outbreak

Management acknowledged that the Covid19 outbreak will likely affect Sime’s bottom-line as the Group has a significant presence in China (31% of FY19 PBIT) and most Asia Pacific countries. Although the Group has no operations in the Covid-19 epicentre Wuhan, it shared that fears of the outbreak had significantly bruised consumer sentiment, causing production disruption and dampening demand for industrial equipment, motor vehicles and transport cargo in its key markets, particularly China.

Source: Affin Hwang Research - 27 Feb 2020