FW: Tranfer coverage: Sime Darby Bhd (SIME MK; HOLD; TP: MYR2.10) - Outshining its siblings

 

 

 

 

In essence, we like SDB for its:

Ø  Recognised regional (APAC) brand value with a diversified exposures

Ø  Sustainable earnings base, derived mainly from a recurring and higher-margin after sales service and parts revenue (MYR7.2b or 23% of Group revenue in FY17)

 

But, we believe that:

Ø  Despite strong recovery in the Industrial division, FY18’s core earnings may not repeat FY17’s high due to (i) the absence of a chunky interest income from discontinued operations (MYR465m in FY17 – mainly from Sime Darby Plantations) and (ii) possibly lower dividend income from 49%-owned BMW Malaysia due to high DPR (>150%) in the previous years

 

Sime Darby Bhd (SIME MK; HOLD; TP: MYR2.10) - Outshining its siblings

• Priced in. We resume coverage on Sime Darby Bhd (SDB) with a HOLD following the demerger of its plantation and property subsidiaries with a new SOP- TP of MYR2.10, implying a FY19 PER of 17.9x. While we are positive on the demerger to establish three specialised champions in their respective fields, we believe that SDB’s share price performance post re-listing has fully reflected its asset values. Longer term, the successful execution of SDB’s strategies will be the key for further re-rating. HOLD for 3% yields.

• A recognised brand name across Asia Pacific. SDB is a home-grown success story with an extensive reach across the Asia Pacific region. From its diversified exposure, we like SDB for its sustainable earnings base which is mostly derived from recurring after sales service and parts (MYR7.2b or 23% of Group revenue in FY17). The sizeable proportion of this higher-margin earnings stream differentiates SDB from its peers in the Automotive/Industrial equipment trading businesses; this allows SDB to weather through volatile economic cycles and maintain a commendable profitability track record.
• A middle child, no more. The demerger exercise is a positive for SDB’s reinstated anchor businesses (i.e. Industrial and Motors) which require more dedicated management attention in order to improve their respective time-to-market and better manage their expansion plans. Alongside likely lower head office costs following the demerger, we believe that SDB will emerge as a leaner and meaner player in its space going forward. Elsewhere, future rationalisation of its non-core assets (i.e. 12% E&O stake, insurance broking arm, land assets, logistic ops), could further enhance SDB’s financial position for any potential synergistic M&A activities, if not a special dividend. SDB’s current operations are highly cash generative with a net gearing of just 12% end-FY18, we project. 
• HOLD for now. High base in FY17 core earnings (skewed by a non-recurring MYR465m finance income mainly from Sime Darby Plantations) will be hard to topple despite a strong projected recovery in the Industrial division. As we await the next re-rating catalyst, valuations are fair at 20x FY19 EPS.

 

 

 

 

 

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