We attended SIME’s 9M18 results briefing with our cautious view unchanged. Its core Motors division continued to be impacted by strong competition and cautious consumer sentiment albeit a stronger Industrial division. The briefing was presented by the group CEO, CFO and Strategy Officer which was well-attended by 30 analysts and fund managers. Maintain MP with an unchanged TP of RM2.70 based on SoP.

New models to boost demand. For 9M18, the motors division registered flat revenue growth to RM15.4b due to lower group car sales by 3% to 60,769 units and cushioned by higher unit produced in the group assembly line by 50% to 22,690 units. Nonetheless, core PBT was higher by 15% to RM411m from the divestment of the loss-making BMW business unit in Vietnam. Moving forward, the group expects its key region, China/HK/Macau segment to maintain the leading position (42% of the group car sales) with favourable products mix of SUV, new energy vehicles and luxury segment catalyst for China sales, albeit slower growth in HK due to tight macro factors, and supported by Singapore/Thailand segment from the strong growth in household spending, and expiry of lock-up period for certain regulations, Malaysia segment from the new vehicles sales and Australia/New Zealand from its government support in transport infrastructure investment. The group expect to launch new models in 4Q18 to boost the group car sales namely Range Rover Velar, BMW X3, BMW M5 and MINI Cooper Countryman. The group, recently launched its BMW engine assembly facility in Kulim, Kedah, estimated to produce 10k engines per year, which will improve its cars local content and be more cost competitive.

Industrial division, registered higher order-book of RM2.35b.

Backed by the 68% YoY jump in order-book to RM2.35b (as of 31st March 2018), for 9M18, the division registered higher revenue by 31% to RM9.5b and higher core PBT by 62% to RM305m. Moving forward, in the Australasia region (56% of the group industrial sales), the group expects a stronger position with the uptick in the mining cycle. While, China/HK will be seeing more construction activities in urban development with its encouraging fiscal and monetary policies. In the Southeast Asia region (excluding Malaysia), Singapore will be eyeing heavy equipment’s market with continued public investment valued at RM640m in infrastructure projects and the electric power segment sets to see increasing demand for standby generator in supporting data centers. Lastly, for Malaysia, we expect to see a short-term slowdown in equipment demand following the new government initiatives to review major development projects.

Outlook. The Industrial division’s product support operations in Australia continue to show growth as a result of the recovery of the mining business, whilst the China operations are benefiting from strong demand from the construction industry whereas the Motors division’s performance is expected to improve with higher sales from new model launches in the coming quarters. Nevertheless, the Motors operations will continue to be impacted by strong competition and cautious consumer sentiment. On the other hand, Port operations face competition from other ports as well as environmental controls implemented by local authorities limiting the operating time of the ports. 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)

Maintain MARKET PERFORM with an unchanged target price of RM2.70 based on Sum-of-Parts (SoP). Risks to our call include: (i) lower-than-expected car sales volume, and (ii) unfavourable forex.

Source: Kenanga Research - 30 May 2018