This article first appeared in The Edge Financial Daily on September 17, 2019

Sime Darby Bhd
(Sept 13, RM2.34)
Maintain outperform with an unchanged target price of RM2.54: Sime Darby Bhd announced that its wholly-owned subsidiaries under Sime Darby Motors Sdn Bhd (SDM) has proposed to acquire the business assets and properties of three luxury car dealerships in Sydney, Australia from Trivett, the automotive retail unit of Inchcape Australia Ltd, for a consideration of A$112 million (RM321 million). The three dealerships represent the BMW, MINI, Volkswagen, Jaguar, and Land Rover marques. We believe the industrial segment will remain as the key earnings driver of the group in the near term due to the strong growth in Australian mining industry, which should help partially offset impact of a softer market for the motor segment.

SDM has entered into a definitive agreement with Trivett to acquire the business assets and properties of three luxury car dealerships in Sydney. Trivett is currently Australia’s largest prestige automotive group and retail unit of Inchcape Australia, which represents 14 automotive brands including a majority of the world’s most esteemed marques. The proposed acquisition is expected to be completed by early December. However, this is subject to written consent from the Foreign Investment Review Board of Australia as well as the brand principals.

We understand that currently Sime Darby owns a dealership for Porsche marque in Parramatta, one of Sydney’s most recognised automotive retail locations. The proposed acquisition is aligned with SDM’s strategy to expand its Australian retail luxury segment, strengthening its presence and brand visibility in Parramatta.

The acquisition price of A$112 million translates into a 28 times price-earnings ratio (PER), which looks higher compared with our ascribed PER of 16 times for the motor segment in our sum-of-the-parts valuation. However, note that the proposed acquisition includes all the properties and business assets. It will be funded via external borrowings. As at FY19, Sime Darby had a net debt of RM852 million. The acquisition is expected to increase its net gearing to 11.4% (from 10% in FY19). Earnings contribution from this acquisition is likely to be around 1%-2% to its motor’s earnings before interest and tax (Ebit) segment, hence we make no changes to our earnings forecasts. To note, currently Australia contributes to about 16% of pre-tax profit for its motor segments and about 6% to its group’s Ebit. — PublicInvest Research, Sept 12