1Q19 core PATAMI of RM171m (+138% YoY, -42%QoQ) came in within both our/consensus expectations at 21% each of full-year estimates. The group noted that the Motors division will continue to be impacted by strong competition, but overall to be cushioned by strong Industrial division performance with the recovery of the mining industry in Australia. Maintain MARKET PERFORM with an unchanged TP of RM2.55 based on Sum-of-Parts (SoP).

1Q19 within expectations. 1Q19 core PATAMI of RM171m (+138% YoY, -42% QoQ) came in within both our/consensus expectations at 21% each of full-year estimates. The 1Q19 core PATAMI is after excluding one-off items namely; (i) reversal on receivables (RM2m), (ii) net inventories provisions (RM36m), (iii) gain on properties disposal (RM2m), (iv) gain on disposal of others (RM1m), (v) gain on disposal of subsidiary (RM78m), and (vi) net foreign exchange losses (RM7m). No dividend was declared as expected. The group typically paid dividends on 2Q and 4Q.

YoY, 1Q19 core PBT surged 44% attributed to: (i) higher Industrials core PBT segment (+118%), with the higher total order-book of RM2.6b (+8%), and supported by higher equipment deliveries and product support sales to the construction and mining sectors in Australia, (ii) lower Motors Vehicles core PBT segment (-23%) from heavy discounting activities to sustain the sales momentum (total global vehicles sales at 22,322 units (+10%)), and (iii) lower Logistics core PBT (-39%) due to the cessation of profit recognition from disposal of Weifang Sime Darby Water Management.

QoQ, 1Q19 core PBT plunged 32% as Motor Vehicles segment’s core PBT plunged 63% with the absence of dividend received from 49%- owned, BMW Malaysia Sdn Bhd (at RM121m) which typically recognized in 4Q as well as lower margins in most regions as a result of competition and heavy discounting activities; however, this was cushioned by the increase in Industrials segment’s PBT contribution (+39%) with the higher equipment and parts sales to the mining and construction sectors in Australia and China.

Outlook. The Industrial division’s product support operations in Australia continue to show growth as a result of the mining business recovery, 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, 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 will continue to rationalize its logistics operations (with remaining 4 ports) which could see value unlocking of RM1.2b of its net book value (RM0.18/share). SIME had divested its previously 100%-owned Weifang Sime Darby Water Management for USD68m or c.MYR275m (at 1.3x PBV) through competitive bidding.

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 - 22 Nov 2018