This article first appeared in The Edge Financial Daily on November 22, 2018

KUALA LUMPUR: Sime Darby Bhd has set aside a capital expenditure (capex) of RM940 million for its financial year ending June 30, 2019 (FY19) to be utilised for upgrading its showrooms and branch offices across the region.

Speaking at the media briefing on its first financial quarter ended Sept 30, 2018 (1QFY19) yesterday, its group chief executive officer Datuk Jeffri Salim Davidson said the capex will be funded through bank borrowings and internally generated cash.

“We have about 100 showrooms [for both industrial and motor businesses] and 100 branches … and they have to be regularly upgraded. [Capex allocated for upgrading] is quite significant every year,” said Jeffri.

According to Jeffri, Sime Darby will be taking up more dealerships for the luxury car production, especially in China and Australia.

For its motor business, Jeffri said the group is expecting a modest growth in sales in FY19, adding that the upcoming new model launches of the BMW 7 Series, Ford Ranger, Hyundai Tucson, and BMW X5 are expected to boost sales in 2QFY19.

As of 1QFY19, there are 22,322 units of cars sold and 10,251 units assembled, compared with 20,308 units sold and 4,499 units assembled last year.

The ongoing trade tension between China and the US, coupled with tightened controls on bank lending, is expected to affect the sales growth of the motor divisions in China, Hong Kong, Macau and Taiwan, said Jeffri.

The total core profit before interest and tax (PBIT) for the motor division declined 23.4% to RM105 million in 1QFY19, from RM137 million in 1QFY18.

Sime Darby’s net profit from continuing operations dropped to RM225 million in 1QFY19, from RM248 million in the previous corresponding quarter due to lower profit from heavy equipment and automotive dealership businesses. However, the group is expecting a “satisfactory” net profit for FY19 that will be driven by its two core businesses — industrial and motor.

Meanwhile, its quarterly revenue from continuing operations was marginally higher at RM8.85 billion compared with RM8.14 billion a year ago.

Notably, the company’s core net profit is up 57.4% to RM192 million due to lower one-off gains, from RM122 million.

For its industrial division, the total core PBIT jumped 118.3% at RM179 million from RM82 million a year ago, due to higher equipment deliveries to the mining and construction sectors in Australia, as well as the higher margins from both equipment and parts.

At home, Sime Darby’s industrial division slipped into a total core loss before interest and tax (LBIT) of RM4 million, compared to a PBIT of RM12 million in 1QFY18, due to lower equipment deliveries to the construction sector and the deferment of the mega infrastructure projects.

On prospects for the industrial segment, Australia’s current favourable commodity price levels are expected to drive miners to increase capex for both equipment replacement cycles and expansions. Also, higher machine utilisation levels are expected to support strong parts and services sales revenue growth.