Sime Darby - Well Positioned for Subsidy Rationalisation; Still BUY

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+0.64 (25.00%)
  • Still BUY, new MYR3.20 SOP TP (from MYR3.15), 11% upside, c.5% FY25F (Jun) yield. While 9MFY24 earnings missed our and Street's full-year forecasts due to higher-than-expected interest cost and minority interest, Sime Darby is well positioned for the impending subsidy rationalisation, given its wide range of offerings across various market segments in the local automotive scene.
  • 9MFY24 core earnings of MYR934m missed our and Street’s expectations at 60-68% of full-year forecasts. This was mainly due to higher-than- expected interest cost and minority interest.
  • 3QFY24 motor segment PBIT rose 6% YoY, bringing 9MFY24 PBIT to MYR575m (+16% YoY). The YoY rise was mainly due to its Malaysia motor business (+57% YoY) as sales volumes doubled YoY but was offset by the China motor business, which recorded a MYR21m loss (3QFY23 PBIT of MYR24m) due to the price war, while ASPs declined 2% YoY.
  • Industrial segment was still robust, with 3QFY24 PBIT of MYR359m (+52% YoY), resulting in 9MFY24 PBIT rising 58% YoY. Over 86% of the PBIT came from Australasia, thanks to robust commodity prices that supported mining activities, on top of SIME’s recent acquisitions – Onsite Rental and Cavpower Group – contributing c.14% of the region’s 9MFY24 industrial PBIT.
  • UMW’s performance. SIME’s core PBIT rose 34% QoQ in 3QFY24, thanks to its newly acquired UMW, which contributed MYR302m to the bottomline (39% of core PBIT). The addition of mass market brands under UMW strengthens SIME’s presence in the local auto market, as its Malaysia operations now make up 27% of its 9MFY24 revenue, from 15% in 9MFY23.
  • Outlook. The industrial division is expected to post strong numbers as robust commodity prices continue to encourage mining activities. China industrial unit’s performance is expected to stay muted, given the weak market sentiment, while a meaningful recovery with regards to the EV price war is unlikely in the near term. In Malaysia, we expect the earnings base to grow, as SIME’s auto market share has expanded thanks to the UMW acquisition.
  • We cut FY24F-26F earnings by 7-14% to account for higher interest expenses and minority interests, and revise up our 2024 Perodua sales volume assumption to 330k units (from 250k units) to reflect Perodua’s sales target for the year.
  • Valuation. Our TP includes a 2% ESG discount as we roll forward our valuations to FY25F. With the impending subsidy rationalisation, we think SIME is well positioned in the local auto market, given its exposure to mass market brands under UMW (Perodua and Toyota) on top of its luxury brand offerings. Risks: Weaker-than-expected margins, softer-than-expected car sales across its markets, longer-than-expected downturn in China.

Source: RHB Research - 24 May 2024

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