SIME’s FY24 results met our expectation but disappointed the market. Its FY24 core net profit jumped 15% YoY driven by its industrial and automative segments and consolidation of UMW’s earnings. The heavy price discounting drawback in the automotive market in China has started to see a green shoot of recovery. We maintain our forecasts, TP of RM2.90 and OUTPERFORM rating.

Its FY24 core net profit (excluding one-offs at RM183m) met our expectation at 102% of full-year forecast, but disappointed the market at only 91% of the full-year consensus estimate. It declared a final interim NDPS of 10.0 sen in 4QFY24, with a total NDPS of 13.0 sen for FY24 vs. 13.0 sen paid in FY23, within expectations.

YoY. FY24 revenue rose 39% driven by strong industrials (+29%) and automotive (+19%) sales and maiden top-line contribution of RM9,410m (1H and 17 days) from UMW. There was pent-up demand for maintenance works (due to supply-chain disruptions) while prices for auto 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 142,901 units (+22%) 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 1HCY24, UMW Toyota & Lexus sold 47k units (-4%), while Perodua sold 170k units (+17%). Correspondingly, its FY24 core net profit rose 15%.

QoQ. SIME’s 4QFY24 revenue was flattish as strong performance from industrials (+5%) was offset by weaker automotive sales (-1%) due to stiff competition from local EV players as well as weaker contribution of RM4,123m (-5%) from UMW due to lower Toyota Vios sales. Its core net profit, however, rose 8% largely due to favourable sales mix.

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 drawback in the automotive market in China (China region fell into a pre-tax loss of RM123m vs pre-tax profit of RM124m in FY23) has started to seen green shoots of recovery in July and August 2024 (average market discounting rate lessened by 3%) as local government has started to regularise the industry. Furthermore, SIME continues to lobby its BMW principal in China for better distribution margins as well as closing down its non-profitable dealerships and showroom. It is looking to roll out higher-margin all-new models of BMW i5 M60 (Australia), XPeng X9 (Hong Kong/Macau), Volvo EX30 (China) and Volvo XC90 (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. It looks to divest its Komatsu business in 2QFY25 or 4QCY24, while remaining optimistic on the remaining business prospects under equipment business.

Forecasts. Maintained.

Valuations. We also maintain our SoP-derived TP of RM2.90 (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 >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 - 28 Aug 2024