1H19 CNP of RM360m (+12% YoY) came in within our expectation at 45%, but below consensus at 40%, of full-year estimates. The group highlighted 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. No changes to our FY19-20E CNPs. Nevertheless, we cut our TP to RM2.35 from RM2.55 as we revised our Sum-of-Parts (SoP) composition. Maintain MP.

1H19 within our expectation. 1H19 CNP of RM360m (+12% YoY) came in broadly within our expectation at 45%, but below consensus at 40%, of full-year estimates. Note that, 1H19 CNP excludes tax on disposal of Weifang Water (RM13m) and deferred tax credit arising from change in real property gain tax (RM129m) in Malaysia. A 1st Interim DPS of 2.0 sen was declared for the quarter, as expected. The group typically paid dividends in 2Q (2.0 sen) and 4Q (6.0 sen).

YoY, 1H19 core CNP increased 12% mainly from the higher Industrials core PBT segment (+53%), with the higher total order-book of RM2.6b (+14%), supported by higher equipment deliveries and product support sales to the construction and mining sectors in Australia. This was, however, more than offset by: (i) lower Motors Vehicles core PBT segment (-16%) from heavy discounting activities to sustain sales momentum (total global vehicles sales at 45,190 units (+8%)), and (ii) lower Logistics core PBT (-40%) from the lower general cargo throughput (-14% to 14.7m MT) caused by severe weather condition.

QoQ, 2Q19 core CNP decreased 13% mainly from the seasonally lower Industrials segment’s PBT contribution (-6%) during year-end season but cushioned by higher contribution from Motor Vehicles segment’s PBT (+14%) and logistics segment’s PBT (+36%) with seasonally stronger year-end promotional activities and recovering throughput volume.

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 operation is benefiting from strong demand in the construction industry. Nevertheless, the Motors operation will continue to be impacted by strong competition and cautious consumer sentiment, whereas its Port operation 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 a lower target price of RM2.35, from RM2.55 as we revised our Sum-of-Parts (SoP) composition, to reflect the weak market condition for its China Motors division, which comprises 50% of SIME’s volume sales (ascribing lower targeted PER of 10x CY19 EPS, from 12x CY19 EPS).

Risks to our call include: (i) lower-than-expected car sales volume, and (ii) unfavourable forex.

Source: Kenanga Research - 22 Feb 2019