FW: Results: Sime Darby Bhd (SELL; TP: MYR2.45) - Above expectations, Briefing takeaways: Pecca

 

 

Good morning,

 

We have a results note on Sime Darby Bhd and some key takeaways from Pecca’s analyst briefing last Friday.

 

Sime Darby Bhd (SIME MK; SELL; TP: MYR2.45) – Above expectations

• Fully priced-in. 9MFY6/18 core earnings was ahead of our expectations as the Logistic and Healthcare divisions surprised on the upside. Along with stronger order book visibility at the Industrial division, we lift FY18-20 earnings forecasts by 8%-9%, having adjusted our revenue and margin assumptions upwards for the respective divisions. Correspondingly, our SOP-based TP is raised to MYR2.45 (+9%). Despite a higher TP, we believe that SDB’s near-term earnings growth potential has been fully priced in; maintain SELL.
• Expect a strong 4QFY18 to close the year. 9MFY18 core net profit of MYR569m (+22% YoY) met 72% of our initial full-year forecast and is ahead of our expectations as we expect a stronger 4QFY18, typically boosted by a sizeable dividend from BMW Malaysia; we expect this dividend to amount to MYR108m in 4QFY18. 9MFY18 headline earnings included various negative one-off items amounting to  MYR114m (mainly from impairment of distribution rights and inventory write-down for the Motor division in Vietnam).

In 3QFY18, the YoY growth in core PBIT (+7% YoY) was led by the Motors division (+29% YoY), boosted by solid sales/margins from the new BMW models. Also, Healthcare (+1x YoY) and Logistic (+39% YoY) divisions boosted group core PBIT; the former saw higher profits at its Malaysian hospitals while the latter benefited from higher port throughput.

• Raise FY18/19/20 earnings forecasts by 9%/8%/8%. Higher-than-expected contributions from the Healthcare, Logistics and Others (mainly Insurance broking) divisions in 9MFY18 prompt our earnings upgrade. We also raise Industrial’s revenue expectations for the Australasia and China regions by 8%-12% to account for the strong sales in 9MFY18; Industrial’s order book closed 5% higher QoQ to MYR2.3b as at end-Mar 2018. Even with our earnings upgrades, valuations are still demanding at 21x CY19 PER for 2-year earnings CAGR of 3% (FY18-20).

 

PECCA Group (PECCA MK; BUY; TP: MYR1.25) – Attractive valuations

• CFO kickstarted the briefing in the presence of founder, Datuk Teoh, by firstly mentioning the following items:

1.    CEO, Mr Michael Tan, has resigned to pursue other opportunities: he was professionally hired and is not the founder of the company

2.    No contracts were lost as a results in change of government

3.    None of their Board of Directors are under investigation

·         Poor results as we have mentioned stems from lower than expected revenue and higher labour costs. On top of what we have mentioned in our report last Friday, here are additional points highlighted by CFO:

o    Low revenue was also a result of a shorter working month due to Feb and CNY. As a result of festivity, higher overtime cost were incurred. On revenue, export sales which are generally higher margins were also lower in the period.

o    On cost, due to the strengthening of MYR compared to year before, some skilled foreign worker decided to go back to their respective countries; ~100 foreign workers left Pecca from Jun to Sep 2017. As a result, new workers were hired and higher foreign worker levy was incurred. Also, due to necessary training for these new workers for the first two weeks (leather is a craftsmenship), lower production and yield inefficiency also hit 3Q18. Going forward, Pecca would put in place performance based incentive to retain their workers.

·         Going forward, 4Q18 looks better with promotion and new car models giving orders to Pecca (i.e.Serena S Hybrid). Also, normalisation of production should help lower labour cost and improve results.

·         For the MYR90m cash warchest, MYR70m will be reserved for M&A; management did not discount that it could be related party – recall that Datuk Teoh also privately owns Tint Auto which carries the sole distributorship of LLumar tinting films in Malaysia. Higher DPR, up to 100% of FY18 earnings, are in consideration due to strong cashflow management. For everything else (aviation and retail leather car seat covers), business as usual.

 

 

 

Ivan Yap | Analyst, Equity Research

Maybank Investment Bank Berhad (15938-H)
7^th Floor, Tower C, Dataran Maybank, 1, Jalan Maarof, 59000, Kuala Lumpur, Malaysia

Tel: +603 2297 8612 | Fax: +603 2284 2137
Email: ivan.yap@maybank-ib.com

 

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