This article first appeared in The Edge Financial Daily on November 1, 2018

Sime Darby Bhd
(Oct 31, RM2.20)
Maintain neutral with a target price (TP) of RM2.40: Sime Darby Bhd announced that its indirect wholly-owned subsidiary Sime Darby Allied Operations Pty Ltd had entered into a conditional share purchase agreement to acquire 100% of Heavy Maintenance Group Pty Ltd (HMG), a heavy engineering services company in Brisbane, Australia, for A$58 million (RM172.2 million). Although we are positive on this acquisition as it complements its existing cylinder refurbishment and chroming business in Mackay, Australia, earnings contribution from HMG is not likely to be significant. The acquisition is believed to be fair at mid-teen earnings multiple, which is comparable to our current valuation of industrial businesses at 16 times price-earnings ratio. We maintain our earnings forecast and our “neutral” call on Sime Darby with a sum-of-parts-based TP of RM2.40.

HMG is an investment holding company. Upon completion of the proposed acquisition, its wholly-owned subsidiary HMG Hardchrome Pty Ltd (Hardchrome) will become an indirect wholly-owned subsidiary of Sime Darby. Hardchrome was incorporated on Jan 8, 1959 in Queensland, Australia. It is involved in the manufacture, refurbishment and surface finishing of equipment used in the heavy industrial sector. It currently has a large state-of-the-art facility in Brisbane and provides services to its customers in Australia and the Asia-Pacific across mining, oil and gas (O&G) and other heavy equipment industries. Its majority shareholder is Pemba Capital Partners Fund I Partnership LP (92.5%), with the remaining 7.5% owned by a number of minority shareholders.

Sime Darby plans to continue building its leadership in the mining cylinder refurbishment market and drive growth in the O&G sector. We understand that HMG will complement Austchrome, its existing business of cylinder refurbishment and chroming in Mackay.

The acquisition price of A$58 million will be funded by external borrowings and expected to be completed by end-2018. It is subject to approval from the Foreign Investment Review Board of Australia. — PublicInvest Research, Oct 31