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

Sime Darby Bhd
(April 16, RM2.21)
Maintain hold with a higher fair value (FV) of RM2.38:
We maintained our “hold” call on Sime Darby Bhd but increased our FV to RM2.38 from RM2.33, based on a rolled-over financial year 2020 forecast (FY20F) price-earnings of 12 times for its motor segment.

We reduced Sime Darby’s FY19 and FY20 core net profit forecast by 7.8% to 7.2%, to account for lower revenue growth and margin assumptions. We are assuming revenue growth of 1% to 2% for Sime Darby’s China motor segment for FY19 and FY20, compared with our previous assumption of 3% to 4%. Our new FY19 and FY20 profit before interest and tax margin assumption for the China motor segment is 1.5% to 1.8%, from 3% to 2.4% previously.

Following the cut in import tariffs to 15% from 25% in China in July last year, BMW dealerships in the region have offered heavily discounted prices for their vehicles to stay competitive against other lower-priced imported cars. The group guided the heavy discounting will continue in the near term as the group’s priority is to preserve market share rather than profitability.

Therefore, we believe the group’s motor segment will remain sluggish in the near term due to a slowdown in sales and margin erosions from China, where we estimate net margins for the motor segment to continue hovering at the 1% to 2% level for the region until FY20F. However, we think sales and margins should normalise in the longer term when the heavy discounting subsides.

The group guided a stable outlook for the industrial segment — Caterpillar equipment — a view that we share. Assuming global mining giants Rio Tinto and BHP Billiton’s share prices reflect the market’s expectations of the outlook for the global mining sector, it seems the sector is currently only in its third year of expansion since mid-2016, versus the last trough cycle between 2011 and 2016. Therefore, we retained our projection of 15% growth for FY20 and FY21 for the industrial segment in Australasia.

We remained “neutral” on Sime Darby. While we are still concerned about the group’s motor segment in the near term, we believe the industrial segment will remain as the group’s backbone for the foreseeable future. We look forward to the group’s plans on expanding the healthcare segment organically on rising affluence and an ageing population. The group still has some housekeeping to do following a demerger at end-2017, resolving to identify non-core assets within three to five years. — AmInvestment Bank, April 16

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