• Reiterate BUY, with new SOP-based MYR2.75 TP from MYR2.60, 19% upside and c.5% FY23F (Jun) yield. Sime Darby’s FY22 beat estimates, with the motor and industrial segments outperforming expectations. Looking ahead, we expect its China motor sales to weather through the various lockdowns, as it did in 4QFY22. The Australasia industrial segment should remain resilient despite softening MET coal prices, as miners head to the service workshops, where it earns a higher margin than from new mining equipment sales. Special DPS could provide further upside to FY23F yield.

• Earnings and DPS beat. FY22 core profit of MYR1.2bn beat our and Street’s forecasts, making up 109% and 106% of full year estimates. The deviation was mainly due to stronger-than-expected margins, as revenue came in line. Its second interim DPS of 7.5 sen brought FY22 DPS to 11.5 sen – above our 10 sen estimate.

• Motor segment – not so bad after all. SIME’s motor sales in China only fell 1.4% QoQ, ahead of our expectations. China’s lockdowns adversely affected the group’s China car sales, as many parts were supplied from Shanghai, which experienced strict lockdowns in March/April. Motor sales in Malaysia jumped 18% QoQ due to the sales & service tax (SST) exemption. Looking ahead, we think that motor sales in Malaysia will remain strong as SIME fulfils its large backlog order. We take comfort in China’s motor order backlog recovering to pre-lockdown levels of 1.5 months, but we are cautious on the potential impact that China’s macroeconomic headwinds could have on motor sales.

• Industrial segment – time for some servicing. Australasia’s industrial PBIT more than doubled QoQ, as the high metallurgical (MET) coal price fuelled orders for new mining equipment. While MET coal price fell 64% off its peak and is currently around USD240/tonne, it is still above the miners’ breakeven cost of USD80/tonne. With easing commodity prices, the miners, who previously postponed their equipment servicing, are now headed to the workshops for servicing, where SIME earns a higher margin vis-à-vis new equipment sales. China’s industrial segment remains weak and is expected to last for at least another 12 months. With a MYR4.4bn orderbook (+12.5% QoQ), we expect its industrial segment to remain robust.

• Forecasts. We marginally lift FY23F earnings by 1% and introduce FY25F net profit of MYR1.47bn, implying 6% YoY growth. We lift FY23F-FY24F DPS to 12.0-12.5 sen from 10 sen each. We forecast FY25 DPS of 13 sen. Assuming SIME distributes half of the Weifang Port disposal proceeds of MYR1,623m as special dividends, that could translate to an additional 12 sen DPS in FY23F, bringing total yield to 10.4%. Proceeds from the potential healthcare asset disposal could also provide further upside to FY23F DPS and yield.

• Stay BUY, with a higher SOP-based TP of MYR2.75 as we roll forward our valuation to FY23F. Our TP includes a 0% ESG premium/discount. Even amidst macroeconomic challenges in the recent months, SIME’s motor and industrial segments have fared well, which we expect to continue into the future. Key risks: Extended downturn in China, softer-than-expected car sales, and worse-than-expected industrial margins.

Source: RHB Research - 18 Aug 2022