SIME’s 1HFY23 results met expectations. Both its industrial and automotive divisions recorded brisk business as economies reopened worldwide. SIME guided for a stronger 2HFY23, riding on China’s re-opening and lifting of coal export ban from Australia to China, boosting demand for heavy mining equipment. We maintain our forecasts, TP of RM2.60 and OUTPERFORM call. The stock offers a dividend yield of >5%.

1HFY23 earnings came in at only 41% each of both our full-year forecast and the full-year consensus estimate. We deem the results within expectations as SIME guided for a stronger 2HFY23, riding on China’s reopening and the lifting of coal export ban from Australia to China to boost demand for heavy mining equipment.

It declared first interim NDPS of 3.0 sen in 2QFY23 (ex-date: 9 Mar; payment date: 10 Mar 2023) vs. 4.0 sen paid in 2QFY22.

YoY. 1HFY23 revenue rose 11% as both its core industrials (+6%) and automotive (+14%) segments enjoyed strong business activities. Its industrial division registered higher order book at RM4.7b (+19%) riding on high commodity prices. Backlogged maintenance works for clients are coming in with higher parts prices (which means better margin) in Australasia given the supply chain disruption. Furthermore, equipment rental business for Salmon Australia has also received positive market response.

Meanwhile, its automotive division sold 56,323 units (+13%) across all markets as the global economy reopened. In terms of geographical regions, Malaysia was buoyed by strong SST-exempted back-logged deliveries, while in other markets such as Singapore, Thailand, China and Australasia, sales were ramped up by electric vehicles.

The automotive division reported lower profit margin of 2% compared to 4% a year ago. Meanwhile, the industrial division recorded higher margin of 6% compared to 5% a year ago.

Consequentially, core net profit fell 20% in spite of stronger revenue due to the weak margin in automotive division on heavy discounting promotion to gain market share in China, partially mitigated by strong margin in mining equipment under industrials division.

QoQ. 2QFY23 revenue decreased by 7% on weaker business condition for both industrials segment (-11%) due to equipment deliveries disruptions (wet weather and year-end holidays) and automotive segment (-5%) due to movement restrictions in China. Its industrial division recorded a stronger margin at 6% compared to 5% in 1QFY23 which overshadowed the automotive division’s weaker profit margin. Consequentially, core profit was higher by 9%.

The key takeaways from the results’ briefing are as follows:

1. SIME guided for mid-single-digit margins for the industrial division with the upwards revision in equipment parts price since June 2022 by the principal. SIME indicated lower but more sustainable coal prices (currently at USD196 per tonnes, vs. a peak of >USD500 per tonnes in early 2022) should drive its other business namely aftersales and products support which entail higher margins compared to equipment sales. We are keeping our industrial margin assumption at 5.6% for both FY23 and FY24.

2. SIME shared that the heavy price discounting in 1HFY23 is a thing of the past, on the heels of the upcoming launch of higher-margin fresh all-new models of BMW XM, BMW 5 Series G60, BYD-Seal, and JLR Range Rover. Meanwhile, it continues to deliver the recently launched BMW i7 and BMW i5 to buyers. Currently, its order backlogs stand at 19k units across all the markets, including 6k units in Malaysia. We are keeping our automotive margin assumptions of 2.3% and 3.0% for FY23 and FY24, respectively.

3. SIME is bullish on the mining and construction sectors in Australia. The resumption of coal exports to China coupled with the general uptrend in commodity prices will boost capex in the resource sector, driving equipment sales and demand for maintenance services. In January 2023, China ended a ban on Australian coal after more than two years. Premium grade Australian metallurgical coal will attract buying from China’s coastal steel mills.

Forecasts. Maintained.

We like SIME for: (i) the robust growth in its businesses, riding on the economy reopening, (ii) the strong brands under its stable such as BMW, Caterpillar, and (iii) its attractive dividend yield of >5%. Maintain OUTPERFORM with SoP-derived TP of RM2.60. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

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 bigticket items like new cars) amidst high inflation, and (iii) persistent disruptions (including chip shortages) in the global automotive supply chain.

Source: Kenanga Research - 24 Feb 2023