Sime Darby’s Recovery on the Horizon with New Launches, Says RHB IB

Sime Darby’s 1QFY23 net profit slightly missed due to softer-than-expected auto margins. However, RHB Research expects Sime Darby to recover in the coming quarters with new model launches in the pipeline across all markets. The local motor wing also continues to see customers placing orders across its brands. Sime Darby’s Australasia industrial segment remains robust while the Chinese industrial wing may benefit from Beijing’s efforts to boost the property sector, although we are of the view that recovery will be slow.

Earnings fell short. 1QFY23’s core profit of MYR207m fell short at 16% of RHB Research’s full-year estimate on softer-than-expected EBIT margins. No devidend was declared, as expected.

Soft EBIT margins that should normalise in the coming quarters. China’s motor segment faced soft margins due to discounts to clear inventory. But, with Sime Darby’s exciting line-up of new BMW models for Malaysia and China, we expect its auto margins to recover in subsequent quarters. While industrial margins remained relatively more robust, the group’s China business remains weak amidst continued challenges in the property sector.

Motor outlook. Sime Darby’s first BYD showroom in Malaysia will be ready by Jan 2023. The research house estimates that it can lift local motors volumes by a low-teens percentage. After Chinese motors volumes rose 36% QoQ, the research house expects the coming quarters to also see similarly strong volumes from the gradual and eventual easing of restrictions in China. The group continues to grow its EV fleet globally and aims to sell 4,500 battery EVs or BEVs by 2023, ie c.5% of CY23F unit sales.

Industrial outlook. Beijing is implementing measures to lift its ailing property sector, which could eventually drive recovery in construction machinery demand and benefit Sime Darby. Nevertheless, the research house is assuming a slow recovery in this segment and is conservative with its FY23 estimates.

In Australasia, demand for its mining equipment, spare parts, and after-sales services should remain strong, supported by sustained and elevated metallurgical (MET) coal price, which, at USD280/tonne, is well above miners’ breakeven costs of USD80/tonne.

Thus, RHB Research has trimmed its FY23F-25F earnings by 9-3% after it had trimmed its margins assumptions and lift interest expenses amidst a higher interest rate environment. It has reiterated its BUY rating on Sime Darby but lifts its target price (TP) to MYR2.80 as it rolls forward its valuation to CY23F. Its TP bakes in a 0% ESG premium/discount.

Factors for the research house to maintain BUY rating are motor wing’s premium marques and growing EV offerings that should fare relatively better in an economic slowdown scenario); industrial unit’s continued resilience from elevated MET coal prices; and potential special DPS from non-core asset sales.

Key risks identified are extended downturn in China, softer-than-expected car sales, and worse-than-expected industrial margin.

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