1H18 CNP of RM350m (+2%) came in within both our/consensus expectations at 47% of full-year estimates. Maintain MARKET PERFORM with a higher TP of RM2.70 based on the revised Sum-of-Parts (SoP) to capture the emerging value from its Motor, Industrial, and Logistics divisions. (Previously, from SoP derived TP of RM2.20).

1H18 within expectations. The reported 1H18 CNP of RM350m (+2%) excluding one-off items namely ((i) impairment on PPP (RM66m), (ii) impairment on receivable (RM9m), (iii) write-down of inventories (RM140m), (iv) gain on properties disposal (RM161m), (v) gain on disposal of associates (RM5m), and (vi) Net foreign exchange gain (RM19m)) came in within both our/consensus expectations at 47% of full-year estimates. An interim dividend of 2.0 sen was announced, and in line as higher full-year dividend is typically paid in the 4Q.

YoY, 1H18 CNP increased by 2% underpinned by: (i) higher revenue across the board (+13%), (ii) higher Industrial Division PBT excluding impairment (+115%) due to higher equipment deliveries and product support sales to the construction and mining sectors in Australia and China, (iii) higher Motors Division PBT excluding impairment (+17%) due to the higher profit from the China and Hong Kong operations, and (iv) higher logistics PBT excluding impairment (+37%) due to higher throughput at Weifang Port.

QoQ, 2Q18 CNP increased by 205%, underpinned by; (i) higher revenue across the board (+8%), (ii) higher Industrial PBT excluding impairment (+78%) due to the higher equipment deliveries and product support sales to the construction and mining sectors in Australia and China, (iii) higher logistics division PBT excluding impairment (+39%) due to higher port revenue. On the other hand, Motors division PBT excluding impairment declined by 4% mainly due to share of loss of an associate in Singapore of RM10.0m in the current quarter as compared to nil in the preceding quarter and lower profit from the Malaysian operations. Note that, Motors division incurred losses in Vietnam (at RM109m against a loss of RM75m in 1Q18) attributed to the cessation of its distributorship and dealership in Vietnam due to operational constraints.

Outlook. Management noted that the Industrial segment has seen improvement recently for product support and better order-book as commodity prices recovered, while China and Malaysia operations remain supported by construction activity. The Motors division’s performance is expected to improve through higher sales expected from launches of new car models in the forthcoming quarters and the ongoing measures to expand the Motors operations. However, the Motors operations continued to be impacted by strong competition and cautious consumer sentiment. The Port operations continued to face competition from other ports and alternative modes of transportation. Nevertheless, the ability of higher tonnage berths to receive higher yielding cargo and the expected commencement of operations at the liquid terminal joint is expected to provide higher service throughput for the ports. We maintain our neutral outlook on SIME as we believe the market has fairly priced the segmental growth with YTD 24% share price gain.

Maintain MARKET PERFORM with a higher target price of RM2.70

based on the revised Sum-of-Parts to capture the emerging value from its Motor, Industrial, and Logistics divisions. (Previously, from SoPderived TP of RM2.20). Risks to our call include: (i) changes in car sales volume, (ii) changes in Forex, and (iii) changes in government regulation.

Source: Kenanga Research - 23 Feb 2018