We attended SIME’s 1H18 results briefing for an outlook overview. Although we are positive on SIME re-focusing its strategy into Motors and Industrials while unlocking the value of its other non-core business, the near-term growth is expected to be limited by the various rationalisation exercises. Maintain MP with an unchanged target price of RM2.70 based on sum-of-parts valuation.

Motors Division, rationalisation exercises in the process. Sime Darby Motors (SDM) is currently undergoing various rationalisation exercises, including the cessation of BMW distributorship in Vietnam (impairments at RM150m for the 1H18), and distribution for Peugeot and Citroen in Australia and New Zealand, while focusing on the launch of Porsche Sydney dealership while the largest Auckland BMW dealership is slated for completion in 2HCY18. Key market - the China/HK/Macau region is expected to maintain its leading position. However, the group is expecting a softer growth (flat sales growth for 1H18) due to economic pressure, rising interest rates, and increase in prices of small engine vehicles. Nevertheless, the Malaysian region show promising outlook with the new product offerings (i.e. CY18-BMW X3, BMW X5, BMW M5, Land Rover Discovery, Hyundai Tuscon, CY19-BMW 3 Series), higher export contribution from the all-new Mazda CX-5, the commencement of BMW engine assembly line in 2H18 as well as a recovery in MYR. For 1H18, the group car sales was lower by 2% to 41,814 units (1H17:42,612 units); however, the group assembly line showed higher unit produced by 24% to 11,917 units (1H17:9,622 units). Overall, for 1H18, the division registered slightly higher revenue of 2% to RM10.6b. However, PBIT was lower by 49% to RM135m.

Industrial Division registered higher order-book of RM2.23b. Backed by the 64% YoY jump in order-book to RM2.23b (as of 31st December 2017), for 1H18, the division registered higher revenue by 38% to RM6.2b and higher PBIT by 271% to RM393m. Moving forward, the group will continue to expand rental and used equipment capability in Asia, negotiate with the principals (CAT, Kubota, New Holland and Terberg) to acquire additional territories while exploring new range of allied products and energy solutions services. On the other hand, China/HK will be seeing more construction works under the ‘Belt and Road’ infrastructure initiative, Malaysia will be seeing more demand for smaller CAT and allied equipment, driven by several mega-infrastructure projects (i.e. ECRL and KL-SG HSR) and Singapore will be eyeing heavy equipments market with continued public investment in infrastructure projects (i.e. MRT line, Changi Airport Terminal and Tuas Mega Port).

Unlocking value in other businesses. SIME may undergo a rationalization of its logistics operations (four ports and two water treatment plans) which could see value unlocking of RM1.4b of its net book value (RM0.20/share). On the other hand, its JV company, Ramsay Sime Darby Healthcare (RSDH) will further its reach with strategic partnership in Asia (especially China), while maintaining organic growth through cost reduction to further drive profit growth capitalising on its existing presence in Malaysia and Indonesia. Whereas, rationalisation of its other non-core assets (12%-owned Eastern & Oriental Bhd, insurance broking arm, and land assets) could further enhance SIME’s value especially for its massive 8,800 acres of land, which fall under the Malaysia Vision Valley land valued at RM2.5b (RM0.40/share). Overall, for 1H18, the logistics division registered higher revenue by 19% to RM173m and higher PBIT by 87% to RM43m whereas Healthcare registered higher PBIT by 32% to RM25m.

Maintain MARKET PERFORM with a target price of RM2.70 based on the Sum-of-Parts valuation to capture the emerging value from its Motor, Industrial, and Logistics divisions. Risks to our call include: (i) higherthan-expected car sales volume, and (ii) unfavourable Forex.

Source: Kenanga Research - 26 Feb 2018