Review

• Sime Darby Bhd (SDB)’s 1QFY20 results came in above ours and consensus expectations. The variance was due to higher-than-expected contribution from the industrial division.

• After excluding gains on disposal and other exceptional items, 1QFY20 core net profit increased by 72.8% YoY to RM318mn. This accounted for 30% and 33% of ours and consensus’ full-year estimate.

• The commendable results were mainly driven by the strong performance of the Industrial division and improvement in the Group’s Motors business in China.

• Automotive – 1QFY20 PBIT surged by 27.6% YoY to RM134mn. The higher contribution was mainly driven by improving margins and higher revenue in China, which has helped to offset lower sales in Malaysia as a result of the absence of zero-rated GST.

• Industrial – 1QFY20 PBIT increase by 41.3% YoY to RM260mn. The strong performance was underpinned by higher equipment deliveries to the mining and construction sectors in Australia and China.

• Logistics –1QFY20 PBIT plunged by 93.3% YoY to RM6mn, dragged by a lower contribution from Weifang Water following its disposal. Excluding gain on disposal of Weifang Water (RM78mn) and its profit contribution of RM9mn recorded last year, 1QFY20 core PBIT would increase by from RM2mn to RM6mn.

• Others –Excluding the impairment in E&O of RM16mn in 1QFY20 and RM35mn in 1QFY19, core PBIT would have decreased by 25% YoY to RM15mn.

• No dividend was declared for the quarter under review.

Impact

• The earnings for FY20 and FY21 have been adjusted higher by 6.5% and 8.3%, respectively, after factoring in higher contributions from the industrial division and depreciation charges. We also take this opportunity to introduce our FY22 earnings forecast of RM1.2bn.

Key Takeaways From The Analysts’ Briefing

• Industrial order book of RM2.5bn as at 30 Sep compared to RM2.4bn recorded on 30 June. Despite growing demand from Australasia, Malaysia and Southeast Asia, management sees more cautious investment approach due to the ongoing trade tension in China. Overall, industrial segment will still be the main driver for FY20.

• Meanwhile, the motor division expected to be challenging due to slowing economic growth and uncertainties in trade tensions weighing on consumer spending in China.

• The divestment of its non-core assets would take longer than expected due to market dynamics and some regulatory hurdle.

Valuation

• SDB’s TP is revised higher to RM2.43/share after the earnings revision. With the total upside of 9%, we upgrade SDB to HOLD from Sell.

Source: TA Research - 27 Nov 2019