Its wholly-owned Sime Darby Motors SB has entered into an agreement to acquire business assets and properties of three Trivett luxury car dealerships (BMW, MINI, Volkswagen, Jaguar and Land Rover marques) in Paramatta, Sydney, Australia for a cash consideration of AU$112m (c.RM321m) which could be financed by borrowings. We are neutral on this acquisition as we expect the earnings contribution to be less than 1% at the group level. Maintain MP with a TP of RM2.20.

Buying 3 Trivett luxury dealerships at AU$112m (c.RM321m). SIME announced the acquisition of the business assets and properties of three luxury car dealerships in Sydney, Australia for a consideration of AU$112m (c.RM321m on AU$/MYR2.8624). The three dealerships represent the BMW, MINI, Volkswagen, Jaguar and Land Rover marques. The agreements were entered into by SIME’s wholly-owned subsidiaries under Sime Darby Motors SB (SDM), with Trivett, the automotive retail unit of Inchcape Australia Limited, on 10th September 2019. The deal is expected to be completed by early December 2019.

Impact to financials. SIME’s Australia division recorded 9,093 units sold in FY19 or RM2.8b in sales (c.11% of total Automotive sales) and EBIT of RM98m (c.16% of total Automotive EBIT, 3.5% EBIT margin). Based on the location of Paramatta (suburbs) compared with SIME’s current dealerships at Brisbane (City), we guesstimate the three luxury dealerships to contribute at least 30% of the current revenue/profit at c.AU$300m (c.RM858m)/net profit of AU$4m (c.RM11.5m) which works out to an acquisition PER of 28x, and at premium to average Australian automotive players’ PER of 15x, which we believe is due to its niche luxury market (dealerships right) and limited target market. Following the acquisition, we expect SIME’s net debt to increase to RM1.2b (net gearing at 0.08x) from RM852m (net gearing at 0.06x) as of 31st June 2019. For illustrative purposes, assuming additional finance costs of RM11.6m/year (average at 3.6% rate), the acquisition would have no impact to our FY20E and FY21E CNPs. Nevertheless, the synergy from the expanding dealerships and business assets acquisition could positively contribute to the group earnings in the long-term.

Rationale of the acquisition. The proposed acquisition is aligned to SDM’s strategy of expanding its Australian retail luxury segment and will strengthen SDM’s presence and brand visibility in Parramatta, which is one of Sydney’s most recognised automotive retail locations. Currently, SIME distributed BMW, MINI, PORSCHE, FERRARI, ALFA ROMEO, FIAT, VOLVO, and COREFLEET(rental).

Outlook. The Industrial division in Australia continued to show growth as a result of the mining business recovery, but near-term could be affected by softer demand, as evident from the lower order-book. In the long term, sales contribution from Gough Group NZ at c.RM1b/year (to be finalized by Sep 2019) could improve order-book. The Motors operation and Port operation will continue to be impacted by strong competition, especially with the China government rationalizing ports operations to create a larger entity. SIME will continue to rationalize its logistics operation (with remaining 4 ports) which could see value unlocking of RM1.2b from its net book value (RM0.18/share).

Maintain MARKET PERFORM with unchanged Target Price of RM2.20 based on Sum-of-Parts (SoP) which implied PER of 17.4x on FY20E EPS (at 24% premium to local peers’ average PER of 14x due to its large market capitalization and bulk of its earnings coming from industrials, which entailed higher PER valuation).

Risks to our call include: (i) a sharp downturn in the economy leading to lower-than-expected car sales volume, and (ii) unfavourable forex.

Source: Kenanga Research - 12 Sept 2019