SIME is acquiring a 61.18% stake in UMW from Permodalan Nasional Berhad (PNB) and Amanahraya Trustees Berhad (ART) for RM3,574m or RM5.00 per share in cash. We estimate the all cash deal will boost its earnings by 14%. Separately, SIME’s FY23 results beat expectations on stronger BMW Malaysia contributions. We raise our FY24F net profit by 2%, lift our TP by 2% to RM2.45 (from RM2.40) and maintain our OUTPERFORM call.

Acquiring 61.18% stake in UMW for RM5.00 per share. SIME has proposed to acquire 61.18% stake of UMW from PNB and ART for RM3,574m or RM5.00 per share in cash. In accordance with the Malaysian Code on Take-overs and Mergers, SIME will extend a mandatory general offer (MGO) for the remaining shares it does not own in UMW from minority shareholders at RM5.00 per share. Assuming full acceptance, the total price tag to SIME is RM5,841.5m. SIME does not intend to maintain the listing status of UMW. The proposed acquisition and MGO is expected to be completed by 4QCY23 and 1QCY24, respectively.

Acquisition at 20% premium to peers’ valuation. For illustrative purposes, assuming a 100% stake acquisition at RM5.00 per share, Sime has to fork out RM5,841.5m. The proposed acquisition works out to a PER and PBV of 13.2x and 1.2x, respectively which is a premium valuation to passenger vehicles peers’ average PER of 11x and PBV of 1.0x, respectively.

Impact on earnings and gearing. For illustration purposes, based on our calculation (see page 2), assuming a 100% acquisition, SIME’s FY25F earnings is expected to be enhanced by 14%. Post-acquisition, SIME’s net debt and net gearing will increase from RM2,771m to RM8,613m and 0.2x to 0.5x, respectively. SIME plans to pare down its debt by disposing non-core assets, i.e its healthcare business and land assets at Malaysia Vision Valley, Labu.

We are positive on the acquisition that will strengthen SIME’s presence in the local automotive market. Post acquisition, by virtue of having well known marques namely Toyota and Perodua under UMW, SIME’s market share in the local automotive total industry volume (TIV) will be boosted from 3% to >50%. UMW provides access to the massive Toyota ecosystem, a strong high-value supply chain and will enhance SIME’s local market exposure which is in line with Malaysia New Industrial Master Plan (NIMP) 2030.

Meanwhile, SIME’s FY23 results beat both of our forecast and consensus estimate by 13%. The variance against our forecast came mainly from stronger-than-expected BMW Malaysia dividend income contribution on strong performance post the economy reopening. No dividend was declared for the quarter as SIME typically announces half yearly dividends.

YoY, SIME’s FY23 revenue rose 14% as both its core industrials (+10%) and automotive (+15%) segments recorded strong sales. Its industrial division saw an expanding order backlog of RM4.6b (+4%) riding on high commodities prices. There was pent-up demand for maintenance works (due to supply-chain disruptions previously) while prices for parts were higher (translating to better margins) in Australasia. Also helping, was brisk equipment rental business at newly acquired Salmon Australia which has received positive market response.

Meanwhile, its automotive division sold 116,768 units (+15%) across all markets as the global economy reopened. In terms of geographical regions, Malaysia was buoyed by strong SST-exempted order backlogs, while in other markets such as Singapore, Thailand, China and Australasia, sales were driven up by electric vehicles (EV).

The automotive division reported lower profit margin of 2.8% compared to 3.7% a year ago. Meanwhile, the industrial division recorded higher margin of 6% compared to 5% a year ago. Additionally, BMW Malaysia recorded a higher dividend income of RM194m compared to RM48m in FY22.

FY23 core net profit fell 3% on heavy discounting to gain market share in China, especially in the EV segment with multiple brands actively launching new EV models. This was partially mitigated by strong margins in mining equipment.

The key takeaways from its analyst 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 holds the view that coal prices will remain stable, driven by strong demand on economies reopening. Additionally, metals used in the production of batteries for electric vehicles such as lithium, cobalt, nickel, graphite, manganese, copper and aluminium, could be poised for an extended up-cycle. This should drive after-sales and products support which fetch 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 heavy price discounting in the automotive market in China will not go away anytime soon especially with the recent significant price cuts by Tesla in China, coupled with the proliferation of new local electric vehicle brands offering low-entry price points. SIME is currently in negotiation with its BMW principal in China for better distribution margins. Elsewhere, SIME is bullish on the South East Asia market (Malaysia, Indonesia, Thailand, and Singapore) where its new EV launches have been well received. It is looking to roll out higher-margin all-new models of BYD Seal, Kia EV5 and BMW i5 full electric.

Forecasts. We upgrade FY24F net profit by 2% to reflect slightly stronger BMW Malaysia contribution. We also introduced FY25F net profit of RM1,217m (+1%).

Correspondingly, we upgrade our SoP-derived TP by 2% to RM2.45 (from RM2.40) (see Page 3). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

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 >6%. Maintain OUTPERFORM.

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 - 25 Aug 2023