This article first appeared in The Edge Financial Daily on April 4, 2019

Sime Darby Bhd
(April 3, RM2.20)
Maintain hold with fair value (FV) of RM2.33: Sime Darby Bhd announced that Sime Darby Industrial Holdings Sdn Bhd, its wholly-owned unit, has completed the disposal of its 53% equity interest in Sime Kubota Sdn Bhd (SKSB) to Kubota Corp for RM25.9 million.

Following the disposal, SKSB will cease to be an indirect wholly-owned subsidiary of Sime Darby.

This will reduce its shareholding in SKSB from 93% to 40%, consequently turning it into an associate company of Sime Darby.

Sime Kubota is principally engaged in the distribution of a wide range of light equipment and related spares for use in the agricultural, construction and industrial sectors.

In addition to agricultural equipment, Kubota also produces a diverse portfolio of other products including city-wide water filtration systems, irrigation, piping, roofing, housing and large underground valves.

We believe that the disposal will not affect the group’s earnings significantly as management has guided that SKSB only accounted for less than 5% of the topline contribution for the industrial segment’s revenue and less than 2% of the group’s PBT. For the industrial segment, 95% of its revenue is derived from the dealership business of Caterpillar equipment. Any one-off gains from this disposal are not expected to have any material impact on the group’s current net gearing ratio of 0.12 times. We will not be factoring in one-off gains from this transaction to our estimates as our projection is based on core earnings.

We are “neutral” on this news as we believe the group still has some housekeeping to do following the demerger in end-2017 and is resolved to identify non-core assets for this purpose within the next three-five years.

We see no major catalysts to drive Sime Darby apart from the continued strength in the industrial segment. With that, we maintain hold on Sime Darby with an unchanged sum-of-parts-based FV of RM2.33/share and a price earning of 12 times for its motor segment. — AmInvestment Bank, April 3