SIME is acquiring the entire equity stake in Cavpower Group (Cavpower), a Caterpillar (CAT) dealer, for an enterprise value (EV) of AUD500m (RM1,494.8m). The acquisition will strengthen SIME’s presence in the booming mining and infrastructure sectors in Australia and is earnings accretive to the tune of 5%. We keep our earnings forecasts, TP of RM2.40 and OUTPERFORM call pending the completion of the deal.

Acquiring Caterpillar dealer. SIME is acquiring the entire equity interest in Cavpower for an EV of AUD500m (RM1,494.8m). Cavpower is one of the top two CAT dealerships across Asia Pacific (5.2% in market share), servicing primarily the mining, construction industries and energy & transportation sectors, with nine branches throughout the country and an extensive presence in South Australia and Broken Hill (New South Wales), Australia's oldest mining town. Its key clients include huge conglomerates in Australia such as BHP, Santos and Thiess. Hence the acquisition will strengthen SIME’s business relationship with BHP, which is already its largest customer in Australia, while complementing SIME’s existing CAT dealership encompassing Queensland and the northern part of Australia..

Valuation. We estimate Cavpower to report a forward net profit of AUD24m-AUD25m. At the price tag of AUD500m, the forward acquisition PER works out to 20x-21x, which is consistent with the forward PER of 14x-21x of Caterpillar Inc.

For FY22 (June year-end), the Cavpower Group reported a revenue of AUD365m (RM1,092m), and net profit of AUD23m (RM69m). It has a total asset base of AUD244m (RM732m).

Impact on earnings and gearing. Based on an interest cost of AUD35m, our calculation shows that the acquisition will enhance SIME’s FY24F earnings by 5%. Post-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.

We are positive on the acquisition that will strengthen SIME’s 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), Austchrome (chroming) and the recently acquired Onsite Rental Group (equipment lessor). Cavpower provides access to critical mining materials (copper, lithium and cobalt), a AUD3b mining project development pipeline in South Australia and AUD21b infrastructure spending in the Adelaide region (10 major infrastructure projects).

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 RM2.40.

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 - 15 Aug 2023