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Upgrade to BUY from Neutral, new MYR2.60 SOP-based TP from MYR2.40, 16% upside with c.4% yield. Sime Darby’s 3QFY22 (Jun) results fell short of our and Street estimates, being mainly weighed down by China and Australasia’s industrial units. China’s lockdowns will temporarily pressure motor sales, but we believe it will rebound strongly thereafter. While its China industrial segment recovery is a way off, the Australasia industrial margin should normalise in FY23. Our new BUY call is in anticipation of China’s economic recovery, and a special dividend from sale of its healthcare unit.
SIME’s 9MFY22 core PATAMI of MYR816m missed our and Street estimates, and accounted for 70% and 66% of full-year forecasts. The disappointment mainly stemmed from lower-than-expected industrial margins in China and Australasia. The motor division exceeded our estimates, on stronger-than-expected margins.
Results highlights. YoY, 3QFY22 core PATAMI fell 2.1%, mainly weighed down by the industrial unit – China’s industrial sales declined and margins weakened on continued stiff competition, while its Australasia margins fell on one-off COVID-19 expenses. The weaker industrial segment was offset by a strong motor division, which in turn was lifted by higher motor margins, likely due to supply tightness.
Outlook. We expect China motor sales and margins to be weak in 4QFY22, due to lockdowns and potential excess inventory from the lack of demand. As SIME’s auto business is mainly exposed to southern China, it will likely be spared from the severe impact of the current Shanghai and potential Beijing lockdowns. Motor sales should rebound strongly after lockdowns are lifted, partially fuelled by Beijing’s new auto tax relief. Moreover, auto demand should recover faster than supply, and potentially boost its China motor margins. The China industrial segment could remain lacklustre in the near term, but Beijing’s existing and future stimulus measures could engender its recovery. The Australasia industrial margin weakness should not last beyond 4QFY22, and this unit should recover thereafter, given its strong MYR3.9bn orderbook.
We trim FY22F earnings by 6% to account for softer industrial margins, but increase FY23-24F earnings by 2-3%, mainly fuelled by China’s motor and gradual industrial recovery. We also take this opportunity to replace the healthcare unit’s valuation with IHH Healthcare’s (IHH MK, BUY, TP: MYR7.50) offer. Together, these lift our TP to MYR2.60, which includes a 0% ESG premium. Our BUY call is mainly premised on: i) A rebound in motor earnings in China post lockdowns, and ii) the IHH deal materialising with a special dividend distribution. While Beijing’s stimulus measures may eventually spur the industrial segment’s recovery, we think that it is still a way off. We opine that the current share price weakness is pricing in further softness in China, giving investors an opportunity to capitalise on China’s eventual recovery. Key downside risks: Longer-than-expected lockdowns in China, softer-than-anticipated China recovery, weakness in coking coal prices, and lower-than-estimated industrial margins.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....