Kenanga Research & Investment

Sime Darby - Solid Fundamentals, But Priced in

Publish date: Fri, 24 May 2024, 10:43 AM

SIME’s 9MFY24 results met our expectation but disappointed the market. Its 9MFY24 core net profit jumped 38% YoY driven by its industrial and automative segments and consolidation of UMW’s earnings. We maintain our forecasts, TP of RM2.80 but downgrade our call to MARKET PERFORM from OUTPERFORM after the recent run-up in its share price.

Its 9MFY24 core net profit (excluding one-offs at RM276m) met our expectation at 75% of full-year forecast, but disappointed the market at only 65% of the full-year consensus estimate. No dividend was declared as SIME typically distributes half-yearly dividends.

YoY. SIME’s 9MFY24 revenue rose 38% driven by strong industrials (+29%) and automotive (+20%) sales and maiden top-line contribution of RM5,287m (1Q and 17 days) from UMW. There was pent-up demand for maintenance works (due to supply-chain disruptions) while prices for parts were higher (translating to better margins) in Australasia. Also helping, were robust contributions from the newly-acquired Salmon Australia, Cavpower CAT dealership, and Onsite rental group. Meanwhile, its automotive division sold 107,187 units (+27%) across all markets as the global economy normalised. In terms of geographical regions, Malaysia was buoyed by strong order backlogs on new models, while in other markets such as Singapore, Thailand, China and Australasia, sales were driven up by electric vehicles (EV). Additionally, under UMW holdings, for CY23, UMW Toyota & Lexus sold 108k units (+7%), while Perodua sold 330k units (+17%), while in the 1QCY24, UMW Toyota & Lexus sold 23.4k units (-7%), while Perodua sold 85.9k units (+9%). Correspondingly, its 9MFY24 core net profit rose 36%.

QoQ. SIME’s 3QFY24 revenue rose 21% buoyed by strong performance from industrials (+4%) and the first full-quarter contribution of RM4,342m (+359% vs 17 days in 2QFY24) from UMW, partially offset by weak automotive sales (-4%) due to stiff competition from local EV players. Its core net profit rose by a sharper 41% largely due to a lower effective tax rate.

The key takeaways from its results briefing are as follows:

1. SIME reiterated its guidance for mid-single-digit margins for the industrial division. SIME holds the view that coal prices will remain stable, driven by strong demand on economies reopening (healthy order book of RM4.3b). 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 keep our industrial margin assumption at 7% for both FY24 and FY25.

2. SIME shared that heavy price discounting in the automotive market in China will not go away anytime soon (China region fell into a pre- tax loss of RM18m vs pre-tax profit of RM87m in 9MFY23) especially as new local electric vehicle brands flood the market with models with low-entry price points. SIME continues to lobby to its BMW principal in China for better distribution margins. It is looking to roll out higher-margin all-new models of BMW i5 M60 (Australia), XPeng G6 (Hong Kong/Macau), Mini Cooper MINI Electric (China) and Volvo EX30 (Malaysia) to defend its margins.

3. SIME considers UMW as its third core business as it offers diversification with its presence in the mid-market segment (i.e.

Toyota) and the affordable segment (i.e. Perodua), from SIME’s predominantly premium offerings (i.e. BMW). UMW Toyota’s CY24 unit sales target is 95k units (-12%) with backlog orders of over 20k units, while Perodua’s CY24 unit sales target is 330k units (+0%) with backlog orders of over 100k units.

Forecasts. Maintained.

Valuations. We also maintain our SoP-derived TP of RM2.80 (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 economies reopening, (ii) the strong brands under its stable such as BMW, Caterpillar, Toyota and Perodua, and (iii) its attractive dividend yield of >4%. However, the upside to its share price is limited after the recent run-up in its share price. Downgrade to MARKET PERFORM from 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 - 24 May 2024

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