Sime Darby A Local Auto Giant With Cheap Valuation; Keeps BUY – RHB IB

RHB Investment Bank (RHB IB) lifts Sime Darby Bhd’s FY24F to FY26F earnings forecasts and feels that the Sime Darby’s current valuation is undemanding following the consolidation of UMW Holdings Bhd into the group.

“However, we cut bottomline estimates for China given the continued weak sentiment there,” it said today (Feb 22).

As a result, it also raised its sum of parts (SOP)-based target price (TP) to RM3.15 from RM2.85, 20% upside, 5% FY24F (June) yield and kept our BUY call.

“We now factor in UMW into our SOP valuation, with a previously ascribed 14 times target price-earnings ratio (P/E), with a 2% environmental, social, and corporate governance (ESG) discount.

“Post acquisition, Sime Darby is undervalued – it is currently trading at 10.9 times CY24F price-earnings ratio (P/E) versus its historical mean of 13 times.”

Sime Darby recently released for for the second quarter of financial year ended 31 December 2024 (2QFY24) and the first half of the fiscal year (1HFY24), where it declared a 3 sen dividend per share (DPS), which translates to a 25% payout ratio or 1% yield.

In its Malaysia Results Review, RHB IB said the group’s 1HFY24 core earnings of RM594 million largely met both its and Street’s full-year FY24 forecasts. It maintained its FY24 DPS of 13 sen.

“Its 2QFY24 motor segment’s profit before interest and tax (PBIT) rose 27% year-on-year (YoY), bringing 1HFY24 PBIT to RM395 million, or 21% YoY.

“The YoY rise for the second quarter was largely contributed by huge automotive player’s domestic motor business, which surged 84% YoY, driven by higher volumes sold and elevated units assembled.

“This was offset by the China motor business, which recorded a RM16 million loss, as the price war rumbled on while average selling prices (ASPs) declined 3% YoY.”

Besides that, Sime Darby’s industrial segment also recorded a solid growth with PBIT of RM351 million, up by 57% YoY in 2QFY24, resulting in 1HFY24 PBIT rising 61% YoY.

“The Australasia market continued to be the segment’s main contributor, with its recent acquisitions – Onsite Rental and Cavpower Group – contributing 15% of Australasia’s industrial PBIT in 1HFY24.”

Meanwhile, UMW’s financial year ending 31 December 2023 (FY23) earnings doubled to RM835 million compared to RM415 million in FY2 thanks to record high sales from Perodua (+41%) and Toyota/Lexus (+14%).

“While we remain neutral on the post-acquisition synergies with UMW in the short term, we believe the addition of mass market brands to Sime Darby’s offerings strengthens its presence in the local auto market.

On the group’s outlook, RHB IB said it continue to expect the industrial division to record robust numbers, supported by the full contributions from Cavpower.

“The China industrial unit is expected to remain weak given the current macroeconomic headwinds while electric vehicle (EV) overcapacity may see the price war going on for longer.

“In Malaysia, we expect the motor segment to chart stronger results – driven by a flurry of new EV launches – while the UMW acquisition should increase Sime Darby’s overall earnings base moving forward,” it added.

The key risks to its call include Key risk weaker-than-expected margins, softer-than-expected car sales across its markets, and a longer than-expected downturn in China.

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