Kenanga Research & Investment

Sime Darby - Acquiring Aussie Equipment Lessor

Publish date: Fri, 03 Mar 2023, 09:19 AM

SIME has proposed to acquire a 100% stake in Australian equipment leasing company Onsite Rental Group Limited (Onsite) for an enterprise value of AUD635m (RM1,916m). We are positive on the deal as it enables SIME to strengthen its presence in the booming mining and infrastructure sector in Australia and boost earnings, to the tune of 2-5% for FY24. We keep our earnings forecasts, TP of RM2.60 and OUTPERFORM call pending the completion of the deal.

Raising its bet in the Australian equipment market. SIME has proposed to acquire the entire equity interest in Onsite for an enterprise value of AUD635m (RM1,915.9m). Onsite is the second largest business-to-business (B2B) equipment rental service providers in Australia (8.4% in market share), servicing primarily the mining and construction industries, with 39 branches throughout the country with an extensive presence in the Western Australia and Queensland. Its key clients include huge conglomerates in Australia such as BHP, Rio Tinto and Lendlease (the acquisition will strengthen SIME’s business relationship with BHP, which is already its largest customer in Australia).

Valuation. We estimate Onsite to report forward EBIT of AUD50mAUD70m. Applying a 30% corporation tax rate in Australia, this translates to a net profit of AUD35-AUD49m. At the price tag of AUD635m, the forward acquisition PER works out to 13x-18x, which is consistent with the forward PER of 15x-16x of Caterpillar Inc.

For FY22 (June year-end), Onsite rental group reported revenue of AUD302.1m (RM911.5m), EBITDA of AUD121.7m (RM367.2m) and net profit of AUD33.0m (RM99.6m). It has a total assets base of AUD537.7m (RM1,622.3m).

Impact on earnings and gearing. Based on an interest cost of AUD40m, our calculation shows that the acquisition will enhance SIME’s FY24F earnings by 2%-5%. Post the acquisition, SIME’s net gearing will increase from 0.1x to 0.2x which is still manageable. We maintain our forecasts pending the completion of the deal.

The acquisition will enable SIME to strengthen its presence in the booming mining and infrastructure sectors in Australia and bring about synergy with SIME’s existing related businesses in Australia such as Mine Energy solutions, Salmon (earthmoving), Haynes (labour hire) and Austchrome (chroming).

Forecasts. Maintained pending the completion of the deal.

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 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 - 3 Mar 2023

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