FY18 core PATAMI of RM857m (+1%) beat expectations by 14%/7% of our/consensus full-year estimates due to higherthan-expected contribution from Industrials segment. The group noted that the sentiment is still cautious on its main China operation caused by on-going trade tension between China and US. As such, we keep our FY19E/FY20E earnings assumption unchanged. Maintain MARKET PERFORM with an unchanged TP of RM2.55 based on Sum-of-Parts (SoP).

FY18 above expectations. FY18 core PATAMI of RM857m (+1%) beat expectations by 14%/7% of our/consensus of full-year estimates due to higher-than-expected contribution from Industrials segment. The FY18 core PATAMI is after excluding one-off items namely; (i) impairment on PPE (RM96m), (ii) impairment on receivables (RM44m), (iii) write-down of inventories (RM288m), (iv) gain on properties disposal (RM194m), (v) gain on disposal of others (RM5m), and (vi) net foreign exchange gain (RM10m). The group declared 2nd interim DPS of 4.0 sen and special DPS of 2.0 sen, for the quarter, bringing FY18 DPS to 8.0 sen (FY17: 23.0sen), within expectation.

YoY, FY18 core PATAMI increased only by 1% due to the adjustments from the demerger of discontinued operations. Nevertheless, FY18 revenue rose 9% underpinned by: (i) Industrial (+29%) due to higher equipment deliveries and product support sales to the construction and mining sectors in Australia, and (ii) Logistics (+13%) on higher general cargo and container throughput. This was despite the slowdown in Motor Vehicles (-1%) from the cessation of BMW distributorship in Vietnam and Peugeot and Citroen distributorship in Australia and New Zealand, which was softened by strong BMW sales in its major region (China, HK, Macau and Taiwan). Correspondingly, excluding one-off items, its core PBT surged 54% with higher contribution from all main segments, especially from Industrials segment (+72%) of which the surge in order-book, at RM2,747m (+94%), was contributed by the mining cycle up-tick in its Australasia region.

QoQ, 3Q18 core PATAMI surged 64% attributed to: (i) improved contribution from Motor Vehicles segment PBT (+98%) mainly due to lower losses from the discontinued Vietnam operation, and supported by better contribution from Malaysian operation on zero-rated tax holiday, and (ii) continued increase in Industrials segment’s PBT contribution (+68%) with the higher equipment and parts sales to the mining and construction sectors on Australia and China.

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. Nevertheless, the Motors operations will continue to be impacted by strong competition and cautious consumer sentiment, especially for its Malaysian operation (with the implementation of new SST), whereas its Port operations will be facing 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). SIME is currently in the process of divesting it’s 100%-owned, Weifang Sime Darby Water Management for USD68m or c.MYR275m (at 1.3x PBV) through competitive bidding which may be slightly delayed by stringent local regulation.

Maintain MARKET PERFORM with an unchanged target price of RM2.55 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 - 3 Sept 2018