• Sime reported a flat set of results: 1QFY21 core net profit of RM270m accounted for 23%-25% of our and street’s full-year forecasts
• Operationally, Sime’s 1QFY21 core PBIT was higher by 8% yoy to RM438m, thanks to stronger contribution from the motor division
• We believe Sime faces numerous headwinds ahead and cut our FY21-23E EPS forecasts by 5%-13%; lowering TP to RM2.57 and downgrading to HOLD

Motor division core PBIT rose by 66% yoy, thanks to the China market

The motor division was the star performer in 1QFY21 – 1QFY21 revenue and core PBIT improved by 31% yoy and 66% yoy respectively, with most regions experiencing stronger recovery in car sales as lockdowns/restrictions eased. Going forward, we are expecting a softer recovery for the motor division, where the ongoing global supply chain bottleneck could potentially disrupt new model launches (ie. BMW 4 series and iX3 for the China market). The supply chain issue had resulted in Inokom assembling fewer cars for the Malaysian market. In addition, we also think that demand for luxury cars may also subside if the SST exemption in Malaysia is not extended. To recap, the China and Malaysia markets contributed about 70% of the motor division’s 1QFY21 core PBIT.

Weaker contributions from logistics and healthcare

Meanwhile, Sime’s industrial division 1QFY21 core PBIT fell by 25% yoy to RM197m, as a result of weaker contribution from Australasia mining (-34% yoy; contributed c.71% of FY21 industrial core PBIT), partly cushioned by higher contribution of China industrials (+38% yoy to RM58m). Although the industrial order book of RM2.3bn as at Sept20 (+2% yoy) should support near-term earnings, we are concerned that the weaker coal prices amid China’s import ban on Australian coal in early Oct20 could threaten long-term outlook. Elsewhere, the healthcare division’s 1QFY21 core PBIT declined by 7% yoy to RM14m, whereas the logistics segment’s 1QFY21 core PBIT was flat at RM6m. Notwithstanding the 8% yoy improvement in core PBIT, Sime’s 1QFY21 core net profit was flat at RM270m due to the higher effective tax rate. We deem the results below expectations, as we foresee challenges ahead for Sime’s industrial segment.

Downgrade to HOLD with a lower TP of RM2.57

We cut our FY21-23E EPS estimate by 5%-13% after incorporating softer growth and margin assumptions for the industrial and motor segments. We also lower our SOTPderived price target to RM2.57 (from RM2.76) after incorporating lower valuation multiples to reflect earnings and valuation risks arising from the weaker coal prices and a softer recovery for auto sales. Key upside risks include higher-than-expected contribution from the industrial division and higher than expected car sales volume. Key downside risks include competition in the respective divisions, an economic slowdown, and local regulatory risks.

Source: Affin Hwang Research - 27 Nov 2020