Muted impact from Aussie car dealership buy for Sime Darby, says AmInvestment

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KUALA LUMPUR (Sept 12): AmInvestment Bank Research has downgraded Sime Darby Bhd to "Hold" from "Buy" at RM2.32 with a higher sum-of-parts (SOP)-based fair value (FV) of RM2.64.

In a note today, the research house said this was made based on rolled-over FY21F valuations for all of the group's segments.

Since the upgrade on Aug 14 by AmInvestment Bank, Sime Darby shares have risen 9% since.

"We strongly believe that our downgrade is justified as the current share price's upside is limited," said the research house.

Yesterday, Sime Darby announced that its unit Sime Darby Motors Sdn Bhd (SD Motors) has acquired the business assets, liabilities and properties of three luxury car dealerships for A$112 million (approximately RM321 million) in Sydney, Australia from Inchcape Australia Ltd's automotive retail unit Trivett.

The conglomerate's acquisition is expected to be completed by December 2019, said the research house.

Through it, Sime Darby expects to strengthen its presence and brand visibility in Parramatta, one of Sydney's most recognised automotive location.

"Based on our short conversation with Sime Darby's management, the acquisition is to expand the group's foothold in Australia and is in line with its strategy of expanding in the Australian retail luxury segment," said AmInvestment Bank.

It said the acquisition will be funded externally, adding an estimate of A$6.7 million, approximately RM19.3 million, yearly interest repayment, assuming that Sime Darby borrows from an Australian bank at an annual 6% finance cost.

AmInvestment Bank estimates the acquisition will contribute about A$4 million (RM12.9 million) to the group's profit before tax (PBT) level and has incorporated the changes to the forward estimates.

The research house said its net profit forecasts for FY20-22 will be marginally lowered by 0.6%/0.5%/0.5% accordingly.

It said the decision was made based on the increased interest expense from additional borrowings to fund the acquisition of three Australian luxury car dealerships and earnings contribution from the acquisition.

"Overall, earnings for the group's motor segment will remain unexciting in the near term, and we believe that the industrial segment will stay as the group's backbone to drive its revenue ahead," it said.

See also: Sime Darby buying Australia car dealerships for RM321m