CGS International (CGS) views the RM5.8bn acquisition of UMW as positive for Sime Darby Berhad (SIME), as it allows the group to solidify its leading position in the Malaysian auto market while reducing its reliance on the Chinese market (which CGS expects to be challenging in FY24-25F).
The Malaysian Automotive Association (MAA) expects 2024F total industry volumes (TIV) to reach 740,000, a historical high excluding FY23 (Fig 8). Post-acquisition, SIME will account for c.59% of new car sales in Malaysia, and CGS expects it to maintain its market share lead with: 1) strong brand recognition for its luxury/premium offerings (e.g. BMW, Porsche) and newly acquired mass market brands (i.e. Perodua, Toyota), 2) competitively priced EV offerings, and 3) reputation as a reliable after-sales service provider.
CGS expects SIME’s Chinese motor business to continue experiencing margin pressure in FY24F due to the withdrawal of EV tax incentives and heavy discounting by local automakers, but expect some recovery from FY25F onwards.
Industrials: softer mining equipment demand in Australia
SIME’s industrial segment primarily serves the Australian mining and construction sectors (c.75% of its industrial revenue), and revenues have historically tracked in line with metal commodity prices. CGS believes declining demand for Australian metal commodity exports and declining prices will impact SIME’s industrial segment, and they expect a decline in FY24-26F Industrial revenues and earnings.
Upgrade to Add, with a higher TP of RM3.06
CGS raised their rating from Hold to Add on the UMW acquisition being earnings accretive and reducing SIME’s reliance on foreign markets. CGS’s TP of RM3.06 (17.8% upside) is based on 12.8x CY25F P/E, its post-restructuring mean. Share price improvements since the UMW acquisition announcement partly reflects market’s expectations of deal’s earnings accretion, in their view.
While there are potential headwinds from a normalisation in the industrial segment, greater upside would come if: 1) China’s automotive inventory levels fall significantly, and 2) more synergies from UMW are realised (e.g. logistics and holding company cost savings). CGS expects such improvements to materialise in 2025F/2026F, but UMW’s incremental earnings will help support the group’s profitability in the meantime.
Re-rating catalysts are higher metal prices leading to more demand for heavy machinery.
Downside risks include lower metal prices leading to less demand for heavy machinery, and slower-than-expected end to heavy discounting in China’s auto market.
