Sime Darby Berhad recorded RM1.19 billion in profits which came in within most analyst expectations, a slightly weaker YoY performance was due to Covid-19 movement restrictions in its key markets, particularly China. Moving forward, Kenanga expects the economic recovery to drive its motor division and heavy equipment unit. In view of this, the research house maintains OP and SoP-derived TP of RM2.60.
Results highlight, YoY, FY22 core CNP decreased 4% affected by: (i) weaker profit in the Industrial segment (-21%) due to lower profit from the China market (-39%) as a result of significant contraction in equipment market volume, lacking funding from government amidst the China zero-Covid policy restriction while other markets were also affected by various Covid-19 restriction, and (ii) Automotive division recording weaker segmental profit (-4%) due to lower dividend income from BMW
Malaysia (FY2022 of RM48m vs FY2021 of RM113m) as well as weaker China operation (-17%), both affected by inventory shortages and Covid-19 restrictions. On the other hand, its healthcare joint venture continued to record higher profit (+200%) in concurrence with re-opening of economic activities.
The recovery in motor vehicle sales has generally been strong in recent months despite the minor setback in the global supply chain while the gradual easing of China’s zero-Covid policy should help to support the overall numbers (China market has backlogged bookings of 1.5 months while other markets’ back-logged bookings run up to 3 months). The industrial segment is directly impacted by trade tensions affecting China through the mining sector in Australia, albeit likely to be manageable due to robust coal demand from alternative markets in South Korea, Japan, and elsewhere. China’s fiscal stimulus to boost infrastructure investment is seen to benefit its Industrial division. The industrial segment’s order-book is currently at RM4,419m (+35% YoY) anchored by continued strong demand from the mining sector in Australasia.
Forecasts. Maintained.
Kenanga likes the stock for its robust growth for its core business operation riding on economic recovery, and major brands under its stable ensuring sustainable profit growth. The stock also offers an attractive dividend yield of >5%. Maintain
OUTPERFORM with SoP-derived TP of RM2.60. There is no adjustment to our TP based on ESG for which it is given a 3-star rating as appraised.
Risks to call include (i) governments cutting back on infrastructure spending on an austerity drive and/or a slowdown in the mining sector, hurting demand for heavy equipment; (ii) consumers cutting back on discretionary spending (particularly big-ticket items like new cars) amidst high inflation; and (iii) persistent disruptions (including chip shortages) in the global automotive supply chain.
