• Maintain NEUTRAL, with new SOP-based MYR2.40 TP from MYR2.30, 3% upside. Persistent chip and car parts shortage could pose risks to near- term auto sales. Weakness in the China industrial segment may persist longer than expected, while Australasia industrial margins should improve sequentially. We believe Sime Darby will divest the healthcare unit, in line with its overall strategy to focus on its motor and industrial segments. While near-term risks in the motor and industrial segments may weigh, potential special dividends and a 4% yield should provide a safety net.

• Worsening chip and parts shortage may hamper motor sales. The Russo-Ukraine War has exacerbated the chip shortage and disrupted Ukraine's production of wire-harness, potentially causing a further shortage of CBU cars and CKD kits from Europe. While SIME still has ~1.5 months’ worth of BMW inventory and has not felt any further supply disruptions, it risks facing further inventory strain. In our view, Ukraine’s resumption of, and BMW’s relocation of wire-harness production could take months to bear fruit, potentially impacting SIME's auto supply and sales in the near term.

• Robust demand and strained supply to support auto margin. As parts of China lockdown again, car sales may temporarily dip, but we believe the resumption in spending and new electric vehicles (EVs) will drive demand post lockdowns. Strong demand, strained inventory, and luxury cars' price inelasticity should allow SIME to maintain its motor margin, despite costlier car parts.

• Industrial: Weakness in China, stronger Australasia margins. SIME's 1HFY22 (Jun) industrial revenues/PBT from China have fallen 35%/58%, YoY. Management is of the view that the industrial and construction slowdown in China could last longer than expected. On a brighter note, its industrial PBT margins in Australasia should normalise towards 6~7% after weak YTD margins, weighed by adverse FX movements.

• Continued divestment of non-core assets. We think the group will likely accept IHH Healthcare’s (IHH MK, BUY, TP: MYR7.50) offer for its healthcare unit, aligning with the strategy to focus on its motor and industrial segments. We estimate SIME to receive a net gain of c.MYR1.8bn from the disposal of its healthcare unit. Assuming it receives net proceeds of MYR2.6bn, a 100% distribution translates to a potential special DPS of 39 sen/share. On other non-core assets, it is actively looking to divest its Weifang Port in China (Logistics) and Malaysia Vision Valley Land.

• We raise FY22F-FY24F earnings by 1-2% after revisiting our assumptions of its healthcare unit. With the higher CY22F net profit of MYR39m, we now conservatively value its healthcare unit at MYR1.6bn (unchanged 40x P/E), translating to a higher TP of MYR2.40, including a 0% ESG premium. Maintain NEUTRAL, as special dividends and a 4% yield should provide a safety net to the aforementioned risks. Besides, SIME is trading near its 5- year historical average of 13x P/E.

Source: RHB Research - 25 Mar 2022