• Keep NEUTRAL and MYR2.45 TP, 8% upside, c.4% FY23F (Jun) yield. On 1 Mar, Sime Darby acquired Onsite Rental Group, Australia’s second- largest mining- and construction-equipment rental service provider, for MYR1.9bn (AUD635m). While we estimate the acquisition will dilute FY23F- 24F earnings by 3-2% (before breaking even in FY25F), we are positive on the development, as it allows Sime to expand its geographical reach to Western Australia. Onsite’s equipment are also complementary to Sime’s existing offerings, allowing it to better serve its customers.

• Adding to Sime’s suite of products and services. With roughly 60% and 40% of revenue derived from construction- and mining-equipment, Onsite’s equipment (eg vertical lifts and power generators; Figure 3) are mostly ancillary, complementing Sime’s existing offerings of heavy equipment. As Onsite already serves Sime’s current customers, Sime can now get a larger share of its customers’ spending. The acquisition also allows Sime to expand to Western Australia, where Onsite’s customers mine for battery metals (eg lithium) and iron ore commodities.

• Sime is funding the deal with 100% debt to optimise its balance sheet – lifting its gearing ratio to 0.45x from 0.3x. At the MYR1.9bn purchase consideration, the interest cost is expected at c.MYR120m pa, implying a 6.3% rate. The debt has a floating interest rate, which we think could keep interest costs elevated amidst a monetary tightening environment. At FY22 EV/EBITDA of 5.2x, we think the transaction multiple is fair, as it is broadly in line with a similar 2017 transaction – Seven Group Holdings acquired Coates Hire (the largest operator with 19% market share) for 6.5x EV/FY17 EBITDA.

• Onsite’s prospects. On the back of MYR909m and MYR99m in revenue and PAT in FY22 (Jun), we estimate Onsite will achieve PAT of MYR109- 132m in FY23F-FY25F, driven by infrastructure project spending and increased mining for battery metals, which are in great demand amidst the growing EV and solar energy adoption globally.

• Forecasts. With 3-2% FY23F-FY24F earnings dilution (on higher interest expenses), we trim Sime’s earnings accordingly. As we expect the acquisition to break even in FY25F, we maintain our FY25F. Despite near- term earnings dilution, we are positive on the acquisition as it should be earnings-accretive in the long run, given its complementary and synergistic nature, and potential to lift Sime’s Australasia industrial segment’s PBIT margin (currently 6.4% YTD; Onsite’s estimated FY22 PBIT margin: 16%).

• Keep MYR2.45 SOP TP (0% ESG premium/discount), implying 15x FY24F P/E, close to its 5-year mean of 13x. Still NEUTRAL, as we think its China motor and industrial segments’ challenges may persist for the remainder of FY23 and into early-FY24 despite its resilient Australasia industrial segment. Key risks: Softer-than-expected car sales across markets, longer- than-expected downturn in China, further softness in China motor margins.

Source: RHB Research - 3 Mar 2023