Sime Darby - All is Well

Date: 
2024-02-22
Firm: 
KENANGA
Stock: 
Price Target: 
2.80
Price Call: 
BUY
Last Price: 
2.78
Upside/Downside: 
+0.02 (0.72%)

SIME’s 1HFY24 results met expectations. Its 1HFY24 core net profit jumped 27% YoY driven by strong operating results from its industrial and automative segments, coupled with maiden contribution (17 days) from the newly acquired UMW. We maintain our forecasts, TP of RM2.80 and OUTPERFORM call. The stock offers a dividend yield of >4%.

Its 1HFY24 core net profit (excluding net gain on disposal of Ramsay Sime Darby Health at RM2b and Malaysia Vision Valley land at RM279m) met expectations at 46% of both our full-year forecast and the full-year consensus estimate. It declared a first interim NDPS of 3.0 sen in 1HFY24 vs. 3.0 sen paid in 1HFY23, within expectations.

YoY. SIME’s 1HFY24 revenue rose 26% driven by strong industrials (+23%) and automotive (+21%) sales and maiden top-line contribution of RM945m (17 days) from UMW. There was pent-up demand for maintenance works (due to supply-chain disruptions) while prices for parts were higher (translating to better margins) in Australasia. Also helping, were robust contributions from the newly-acquired Salmon Australia, Cavpower CAT dealership and Onsite rental group which has received positive market response. Meanwhile, its automotive division sold 69,340 units (+23%) across all markets as the global economy reopened. In terms of geographical regions, Malaysia was buoyed by strong order backlogs on new models, while in other markets such as Singapore, Thailand, China and Australasia, sales were driven up by electric vehicles (EV). Additionally, under UMW holdings, for CY23, UMW Toyota Motor sold 108k units (+7%), while Perodua sold 330k units (+17%).

Its 1HFY24 core net profit rose 27% largely driven by better margins from industrials and maiden profit contribution from UMW (RM46m at the pre-tax level).

QoQ. SIME’s 2QFY24 revenue rose 11% buoyed by strong sales across the board. Nonetheless, its core net profit plunged 18% mainly due to higher net interest costs (+35%) to finance the acquisition of UMW and Cavpower.

The key takeaways from its results briefing are as follows:

1. SIME reiterated its guidance for mid-single-digit margins for the industrial division. SIME holds the view that coal prices will remain stable, driven by strong demand on economies reopening (healthy order book of RM4.6b). Additionally, metals used in the production of batteries for electric vehicles such as lithium, cobalt, nickel, graphite, manganese, copper and aluminium, could be poised for an extended up-cycle. This should drive after-sales and products support which fetch higher margins compared to equipment sales. We are keeping our industrial margin assumption at 7% for both FY24 and FY25.

2. SIME shared that heavy price discounting in the automotive market in China will not go away anytime soon (only slight improvement, i.e. average discount of 17% vs. 19% in 1HFY23) especially with the proliferation of new local electric vehicle brands offering lowentry price points. SIME is continuously working its BMW principal in China for better distribution margins. It is looking to roll out higher-margin all-new models of BYD Seal (Malaysia), BMW iX1 (Hong Kong/Macau), Mini Cooper MINI Electric (China) and Volvo EX30 (Malaysia) to remain competitive.

3. SIME considered UMW as its third core business as to differentiate its presence in the local automotive market, i.e. midmarket (i.e. Toyota) and affordable (i.e. Perodua) segments, from predominantly premium offerings (i.e. BMW). UMW Toyota’s CY24 unit sales target is 95k units (-12%) with backlog orders of 21k units, while Perodua’s CY24 unit sales target is estimated at 330k units (+0%) with backlog orders of 128k units.

4. SIME shared that it remains committed to dividend pay-out of not lower than 50% of PATAMI. It will focus on paring down its debt from the previous acquisition of UMW holdings and Cavpower before committing to a higher dividend pay-out.

Forecasts. Maintained.

Valuations. We also maintain our SoP-derived TP of RM2.80 (see Page 3). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. We like SIME for: (i) the robust growth in its businesses, post the economy reopening, (ii) the strong brands under its stable such as BMW, Caterpillar, Toyota and Perodua, (iii) its attractive dividend yield of >4%. Maintain OUTPERFORM.

Risks to our call include: (i) governments cutting back on infrastructure spending on austerity drive and/or a slowdown in the mining sector, hurting demand for heavy equipment, (ii) consumers cutting back on discretionary spending (particularly bigticket items like new cars) amidst high inflation, and (iii) persistent disruptions (including chip shortages) in the global automotive supply chain.

Source: Kenanga Research - 22 Feb 2024

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