DIVERSIFIED Sime Darby Bhd will be investing RM150 million to set up a ­facility to assemble engines for German luxury marque Bayerische Motoren Werke AG (BMW) in what could be a potentially lucrative business.

The investment is for a new plant to be located in the vicinity of an existing 200-acre facility in Kulim, Kedah — Inokom Corp Sdn Bhd — in which Sime has a 56% stake.

In an email reply to The Edge, a Sime Darby spokesman says, “Yes, Sime Darby Motors will be assembling three engine models for BMW vehicles at a new facility in the Inokom plant in Kulim.”

It is understood that Sime Darby Motors Sdn Bhd, the wholly-owned unit of Sime Darby, has been negotiating with BMW to export the engines apart from local consumption.

Sime Darby holds a 56% stake at Inokom, while Hyundai Motor Co of South Korea has 15% and Berjaya Auto Bhd controls 29%.

Currently, Sime Darby Motors assembles BMW and Land Rover vehicles in the Inokom plant, while Inokom assembles several Hyundai passenger and commercial vehicles as well as two models of the Mini and Mazda vehicles.

Sime Darby’s motor division also imports, distributes and sells BMW and other luxury automotive brands such as Jaguar, Land Rover and Porsche as well as mass market brands such as Ford and Hyundai in the Asia-Pacific region.

The engine assembly business could be lucrative if the other marques also opt to appoint Sime Darby as their engine assembler.

“If Sime Darby can assemble a BMW engine, it would have little difficulty doing so for other cars,” an industry source says.

Sime Darby Motors contributed the largest chunk of revenue to the group, about 43%, in FY2016, far ahead of its plantation and property segments. But where profits are concerned, the motor division contributed 16% to group profits for FY2016.

In FY2016, the motor division sold 83,060 units, 9% lower than the previous year.

The additional contract to assemble engines is timely, given that the group will be undergoing a demerger soon.

To recap, Sime Darby has decided to spin off its plantation and property arm sometime in early 2018 to unlock value in its assets.

The conglomerate aims to have the plantation and property business listed as two separate units by distributing shares to existing shareholders.

After the demerger, the Sime Darby group will be left with the motor, industrial and logistics business. This means the motor arm will become the largest revenue and profit contributor to the group.

In the email reply to The Edge, the company spokesman says the launch of new car models in the next few months is expected to boost sales and enhance the financial performance of Sime Darby Motors.

Nevertheless, the spokesman adds that the outlook for the motor division remains challenging, particularly for Malaysia, which continues to be adversely impacted by the weak ringgit.

The motor division’s earnings for the second quarter ended Dec 31, 2016, slipped to RM136 million, 7% lower from a year earlier. However, excluding the gain on disposal of property, earnings were higher by 36%. The group attributed the better performance to higher contributions from Malaysia, China, and New Zealand.

Singapore and Vietnam’s contribution shrank for that quarter. Singapore’s reduced contribution from its luxury segment was due to a drop in bidding for certificates of entitlement.

In Vietnam, earnings were lower by 71% year on year as changes to the Special Consumption Tax impacted sales.

China continues to be a strong market for the motor division as it saw a 69% increase in earnings for the quarter, driven by the luxury and super luxury segments, says the group in its quarterly announcement.

Its Australia and New Zealand operations also grew 38% in earnings during the second quarter on the back of better performance of its luxury and commercial vehicle segments.

As for its Malaysian operations, Sime Darby Motors managed to sustain its performance despite tighter lending conditions and the weakened currency, adds the group.

At the group level, Sime Darby’s revenue grew 4.3% to RM12.34 billion while profits more than doubled to RM644 million. President and group chief executive Tan Sri Mohd Bakke Salleh said in a statement the improvements were mainly due to better crude palm oil prices and higher production of fresh fruit bunches.

As at Dec 31, 2016, total borrowings stood at RM15.2 billion. An earlier report by The Edge Financial Daily said half of these borrowings were derived from its plantation and property business. This implies that the gearing for the group, post-demerger, could improve as borrowings related to the plantation and property segments are carved out.

Over one year, Sime Darby’s share price has gained 15.2% from RM7.89. Last Friday, the counter closed at RM9.09, giving it a market capitalisation of RM61.9 billion.

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