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This article first appeared in The Edge Financial Daily on September 13, 2019

Sime Darby Bhd
(Sept 12, RM2.32)
Maintain market perform with an unchanged target price (TP) of RM2.20:
Sime Darby Bhd has announced the acquisition of the business assets and properties of three luxury car dealerships in Sydney, Australia for a consideration of A$112 million (about RM321 million). The three dealerships represent BMW, MINI, Volkswagen, Jaguar and Land Rover marques. The agreements were entered into by Sime Darby’s wholly-owned subsidiaries under Sime Darby Motors Sdn Bhd with Trivett, the automotive retail unit of Inchcape Australia Ltd, on Tuesday. The deal is expected to be completed by early December.

 

For financial year 2019 (FY19), Sime Darby’s Australian division had recorded 9,093 units sold or RM2.8 billion in sales (about 11% of total automotive sales) and earnings before interest and tax (Ebit) of RM98 million (about 16% of total automotive Ebit or a 3.5% Ebit margin). Based on the location of Paramatta in the suburbs compared with Sime Darby’s current dealerships in Brisbane, we estimate that the three luxury dealerships will contribute at least 30% of the current revenue at about A$300 million and net profit of A$4 million, which work out to an acquisition price-earnings ratio (PER) of 28 times, a premium to Australian automotive players’ average PER of 15 times. We believe this is due to its niche luxury market (dealership rights) and limited target market. Following the acquisition, we expect Sime Darby’s net debt to increase to RM1.2 billion (net gearing at 0.08 times) from RM852 million (net gearing at 0.06 times). For illustrative purposes, assuming additional finance costs of RM11.6 million a year, the acquisition would have no impact on our FY20 and FY21 core net profit estimates. Nevertheless, the synergy from the expanding dealerships and business asset acquisition could positively contribute to the group’s earnings in the long term.

 

The proposed acquisition is aligned with Sime Darby Motors’ strategy of expanding its Australian retail luxury segment and will strengthen Sime Darby Motors’ presence and brand visibility in Parramatta, one of Sydney’s most recognised automotive retail locations. Currently, Sime Darby distributes BMW, MINI, Porsche, Ferrari, Alfa Romeo, Fiat, Volvo and Corefleet (rental).

The industrial division in Australia continued to show growth as the result of a recovery in the mining business, but it could be affected by softer demand in the near term, as evident from its lower order book. In the long term, sales contributions from Gough Group in New Zealand at about RM1 billion a year (to be finalised this month) could improve its order book. The motor operations and port operations will continue to be impacted by strong competition, especially with the Chinese government rationalising port operations to create a larger entity. Sime Darby will continue to rationalise its logistics operations, which could see a value of RM1.2 billion unlocked from its net book value (18 sen a share).

We maintain our “market perform” call with an unchanged TP of RM2.20 based on sum-of-parts valuation, implying a PER of 17.4 times estimated FY20 earnings per share (at a 24% premium to local peers’ average PER of 14 times due to its large market capitalisation, with the bulk of its earnings coming from industrials, which entail higher PER valuation).

Risks to our call include: i) a sharp downturn in the economy leading to lower-than-expected car sales volumes; and ii) unfavourable foreign exchange. — Kenanga Research, Sept 12

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