SIME’s takeover of UMW has expanded its presence in the local automotive market to the mid-market and affordable segments, from its previous predominantly premium offerings. This puts it in a better position to navigate the impending fuel subsidy rationalisation. We raise our FY24-25F net profit by 2% and 14%, respectively, lift our TP by 14% to RM2.80 (from RM2.45) and maintain our OUTPERFORM call.

A full spectrum of automotive offerings. Upon the conclusion of SIME’s takeover of UMW (Accept Offer; TP: RM5.00) in Feb 2024, SIME’s presence in the local automotive market will be expanded to the mid-market (i.e. Toyota) and affordable (i.e. Perodua) segments, from predominantly premium offerings (i.e. BMW). This puts it in a better position to navigate the impending fuel subsidy rationalisation. Moreover, SIME will likely benefit from the anticipated new launches of Perodua D66B and Toyota Yaris Cross by April 2024.

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 surge from 3% to >50%. UMW provides access to the massive Toyota ecosystem, a strong highvalue supply chain and will enhance SIME’s local market exposure. Geographically, SIME will have equal exposure to Malaysia, China and Australia with remaining 10% in other markets vs. being predominantly in China previously.

Earnings accretive acquisition. UMW will be delisted in Feb 2024 (offer period ended on 31st January 2024, and UMW will be suspended from trading starting today, 9 February 2024). Recall, the all-cash deal (RM5.8b) to acquire UMW is financed by Sukuk Murabahah (RM3b) and sales proceeds from the disposal of its healthcare business which was completed in Dec 2023 (RM2.8b). Post-business integration, SIME’s net debt and net gearing will increase from RM3,995m to RM5,877 and 0.2x to 0.4x, respectively (which includes UMW’s net cash position at RM1,118m). Subsequently, SIME plans to pare down its debt through: (i) the disposal of Malaysia Vision Valley land in Labu, Negeri Sembilan (RM2,959m), and (ii) the disposal of Komatsu and UMW’s Serendah land.

Forecasts. We raise our FY24-25F net profit forecasts by 2% and 14%, respectively, on earnings enhancement from UMW’s acquisition.

Valuations. Correspondingly, we upgrade our SoP-derived TP by 14% to RM2.80 (from RM2.45) (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).

Investment case. We like SIME for: (i) the robust growth in its businesses, post the economy reopening, (ii) the strong brands under its stable such as BMW, Caterpillar, Toyota and Perodua, (iii) its attractive dividend yield of >5%. 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 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 - 9 Feb 2024