Sime Darby Motors IPO pushed back?

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THE listing of Sime Darby Bhd’s automotive division, which was targeted for the middle of this year, is likely to be delayed due to weak market conditions, sources say.

Sime Darby Motors Sdn Bhd’s (SDM) initial public offering (IPO) was expected to be among the largest on Bursa Malaysia this year, after that of 1Malaysia Development Bhd’s energy unit Edra Global Energy Bhd and Malakoff Corp Bhd.

“Weak market conditions are primarily the reason for the delay. This will now likely be a late third-quarter deal, at the earliest,” a source familiar with the listing plan tells The Edge. Softer markets work against the IPO fetching a good valuation.

Another source says bankers will be keeping a close watch on how soon the market improves. If the FBM KLCI’s gains over the last few days — aided by improved sentiment globally after the European Central Bank announced a massive stimulus programme to revive the ailing eurozone, among other reasons — are sustained, there could be increased optimism for a listing.

The FBM KLCI, which shed 5.66% last year, hitting a low of 1,673.94 points on Dec 16, closed at 1,803.03 last Friday.

It is understood that Maybank Investment Bank and CIMB Investment Bank are among the key banks working on the automotive IPO.

The actual size of the offering has yet to be determined as it is still early days, another source says. Rating agency Standard & Poor’s, however, estimates that Sime Darby’s proceeds from the IPO would be more than RM2 billion, depending on market conditions.

“This is based on the business’ Ebit (earnings before interest and tax) of RM635 million in fiscal 2014 (year ended June 2014), trading multiples of comparable companies and our view that Sime Darby would only float a minority stake,” it says in a Jan 19 credit rating report on Sime Darby.

Edra Global Energy plans to raise over RM9 billion from its listing, which is now expected sometime in the middle of this year after several delays, The Edge reported in its Jan 19 issue.

Malakoff, whose IPO was also delayed multiple times, may raise around US$1 billion from its listing, which is now expected to be in May if all goes well, the report added.

SDM, a major player in Asia-Pacific with a presence in 10 markets — including Malaysia — represents a range of brands, from luxury ones such as BMW, Jaguar, Land Rover and Porsche to mass-market ones like Ford and Hyundai.

The motor division is an important one to the Sime Darby group. It overtook plantations as the largest contributor to the group’s revenue from the year ended June 30, 2011 (FY2011), but is the third largest contributor to earnings, after the plantation and industrial divisions, given its smaller margins.

It accounted for 40.4% of the group’s RM43.91 billion revenue in FY2014 and 15.1% of the group’s RM4.19 billion profit before interest and tax (PBIT).

In the last five years, the motor division’s PBIT has grown, peaking at RM711.4 million in FY2013 before falling 10.8% to RM634.5 million in FY2014.

The current financial year will remain challenging for SDM as it continues to face intense competition and strong pressure on its margins in various markets, including Malaysia.

Sime Darby is due to report its financial results for the second quarter of FY2015 next month. “It will be interesting to see how the motor division performed as that will also affect its IPO valuation,” says an analyst.

Sources say SDM will be benchmarked against regional companies. “It can’t be compared to the big local players like DRB-Hicom Bhd, Berjaya, UMW Holdings Bhd or Berjaya Auto Bhd because these are mainly Malaysia-focused companies, whereas Sime is more of a regional player and only derives about a third of its revenue locally,” says a source.

For the first quarter of the current financial year, SDM’s PBIT rose 3% year on year to RM110 million, driven mainly by higher contributions from its newly acquired BMW operation in Brisbane, Australia, and its truck operation in New Zealand.

SDM’s Malaysian operation, however, fell 12% amid supply issues and a tightening of consumer credit in the country.

Kenanga Research, which has a “neutral” call on the automotive sector, sees total industry volume (TIV) growth in Malaysia staying flat this year compared with a 2% increase last year.

“Although we see headwinds ahead amidst lower consumer disposable income as a result of the Goods and Services Tax’s (GST) implementation (from April) and rising cost of living, we are still expecting TIV to stay flat at 667,000 units, mainly underpinned by a resilient Malaysian economy on the back of our in-house real GDP growth forecast of 5.1% y-o-y and the normal vehicle replacement of old cars (with the current five million cars on the road aged between 10 and 15 years).

“While cheaper car prices could be seen post-GST implementation, this imminent catalyst could easily be offset by tighter credit for hire-purchase as well as the rising cost of living,” the research house says in a Jan 22 report.

Still, SDM is expected to continue with its strategy of expanding in other markets within Asia-Pacific. It has yet to have a presence in Indonesia, the Philippines and Myanmar.

 

This article first appeared in The Edge Malaysia Weekly, on January 26 - February 01 , 2015.