Sime Darby Bhd (SIME) announced yesterday that the group will acquire Cavpower Group (Cavpower), a distributor of Cat equipment in South Australia and Broken Hill in New South Wales, Australia, for a cash consideration of AUD500mn (RM1.49bn).

More Details of Cavpower

Established in 1972, Cavpower is the Caterpillar Inc. (CAT) dealer for South Australia and Broken Hill in New South Wales (NSW), servicing primarily the mining, construction, and energy and transportation industries. Cavpower, headquartered in Adelaide, South Australia, employs more than 450 people through a network of 9 branches across South Australia selling CAT equipment, parts, service and technology solutions.

The Rationale for the Acquisition

The acquisition of Cavpower is expected to offer SIME an opportunity for geographical expansion and penetrate the South Australian heavy equipment dealership market. According to management, the acquisition will complement the existing dealership footprint while diversifying SIME’s businesses from coal markets through exposure to large deposits of critical materials (copper, lithium and cobalt) in South Australia. The acquisition is expected to be completed by 2QFY24.

Potential Earnings Impact

Based on Cavpower’s FY22 net profit of AUD23.1mn, the acquisition PE works out to 21.6x, which appears to be at a premium to Caterpillar, Inc forward PE of 14.5x. We believe this could be due to Cavpower’s niche status as the exclusive dealer for CAT equipment in the said territories.

According to management, the acquisition will be financed by borrowings and internal funds. Note that the group’s net gearing stood at 0.1x as of 31 Mar 2023. A quick back-of-the-envelope calculation indicates that the acquisition will enhance SIME’s FY24 earnings by merely 0.7% with the profit guidance from the management and after factoring in the assumption of finance cost based on 70% debt financing and 30% from internal funds. We are neutral about the deal and believe that the acquisition will help SIME to support its Industrial Division business in Australia in the long run riding on the growing resources, infrastructure, and energy sectors.

Valuation

No change to our earnings estimates, pending finalisation of the deal. Maintain BUY on SIME with an unchanged TP of RM2.45/share, based on the CY24 sum of parts valuation.

Source: TA Research - 15 Aug 2023