SIME recorded FY22 CNP of RM1,195m which came in within expectations. A slightly weaker YoY performance was due to Covid-19 movement restrictions in its key markets, particularly China. Moving forward, we expect the economic recovery to drive its motor division (which will also be lifted by exciting new BMW models, i.e. all-new BMW i3 and i5) and heavy equipment unit (which is also buoyed by the booming mining sector in Australasia). Maintain OP and SoP-derived TP of RM2.60. The stock offers dividend yield of >5%.

Within expectations. FY22 CNP of RM1,195m (-4% YoY) met both our forecast and consensus estimates. Similarly, a second interim DPS of 7.5sen was declared for the quarter (4QFY21: 9.0sen), bringing full-year FY22 DPS to 11.5 sen (FY21: 15.0 sen) which was also within our expectation.

Results’ highlight, YoY, FY22 core CNP decreased 4% affected by: (i) weaker profit in Industrial segment (-21%) due to lower profit from the China market (-39%) as a result of significant contraction in equipment market volume, lacking funding from government amidst the China zero-Covid policy restriction while other markets were also affected by various Covid-19 restriction, and (ii) Automotive division recording weaker segmental profit (-4%) due to lower dividend income from BMW Malaysia (FY2022 of RM48m vs FY2021 of RM113m) as well as weaker China operation (-17%), both affected by inventory shortages and Covid-19 restrictions. On the other hand, its healthcare jointventure continued to record higher profit (+200%) in concurrence with re-opening of economic activities.

Riding on economic recovery. The recovery in motor vehicle sales has generally been strong in recent months despite minor setback in global supply chain while the gradual easing of China zero-Covid policy should help to support the overall numbers (China market has backlogged bookings of 1.5 months while other markets’ back-logged bookings run up to 3 months). Industrials segment is directly impacted by trade tensions affecting China through the mining sector in Australia, albeit likely to be manageable due to robust coal demand from alternative markets in South Korea, Japan and elsewhere. China’s fiscal stimulus to boost infrastructure investment is seen to benefit its Industrial division. Industrial segment’s order-book is currently at RM4,419m (+35% YoY) anchored by continued strong demand from the mining sector in Australasia.

Forecasts. Maintained. We like the stock for: (i) robust growth for its core business operation riding on economic recovery, and (ii) major brands under its stable ensuring sustainable profit growth (such as BMW, Caterpillar). The stock also offers an attractive dividend yield of >5%. Maintain

OUTPERFORM with SoP-derived TP of RM2.60. There is no adjustment to our TP based on ESG for which it is given a 3-star rating as appraised by us (see Page 4).

Risks to our call include: (i) governments cutting back on infrastructure spending on austerity drive and/or a slowdown in the mining sector, hurting demand for heavy equipment; (ii) consumers cutting back on discretionary spending (particularly big-ticket items like new cars) amidst high inflation; and (iii) persistent disruptions (including chip shortages) in the global automotive supply chain.

Source: Kenanga Research - 18 Aug 2022