Review

• Sime Darby Bhd (SIME)’s 1QFY24 results came in within expectations. Excluding all exceptional items, the core net profit increased 32.1% YoY to RM280mn on the back of a 14.8% rise in revenue.

• Automotive – For 1QFY24, PBIT increased 15.3% YoY to RM203mn on the back of a 15.9% surge in revenue. The higher profit from Malaysian operations (+80.0% YoY) was partially offset by lower profit (-60.4% YoY) from China operations. PBIT in Malaysia increased by 80.0% as a result of higher contribution from the assembly and strategic businesses. The group still experienced lower margins at the China operations. Overall unit sales grew 18.7% YoY to 33.4k units.

• Industrial – 1QFY24 PBIT increased by 65.7% YoY to RM358mn, mainly driven by higher profit from Australasia. Note that this region registered higher contributions from the Onsite Rental operations, which SIME acquired in April 2023.

• No dividend was declared for the quarter under review.

Impact

• No change to our earnings forecasts.

Outlook

• We expect automotive sales in China to continue to be impacted by a brutal price war, especially in electric vehicles (EVs). The situation will be exacerbated by inflation and higher interest rates. We expect more aggressive price cuts in 2024 to lure buyers. Management expects price wars to continue to affect margins in a saturated market.

• The industrial division is expected to perform well, premised on the backlog of orders in Australia from the mining and construction sectors.

• Management expects the market volume for industrial equipment in China is likely to be subdued due to weaker consumer confidence, sluggish global demand, and issues in the property sector.

• Meanwhile, the acquisition of UMW is expected to be completed by the 4Q of this year, and the MGO by the 1Q of 2024. Subsequently, the proposed delisting of UMW will also be taking place.

Valuation

• Maintain SIME as Hold with an unchanged TP of RM2.50/share, based on sum-of-parts (SOP) valuation.

Source: TA Research - 28 Nov 2023