SIME's 1QFY25 results met expectations. Its 1QFY25 core net profit rose 19% YoY as consolidation of UMW's earnings helped offset the weaker industrial and automative segments. The heavy price discounting drawback in the automotive market in China has started to see a green shoot of recovery as it returned to profit in 1QFY25 after three quarter of losses. We maintain our forecasts, TP of RM2.90 and OUTPERFORM rating.

Its 1QFY25 core net profit (excluding one-offs at RM436m) met expectations at 26% of our full-year forecast and 22% of the full-year consensus estimate. The one-offs include gain on disposal of Malaysia Vision Valley (MVV) land (RM458m), gain on disposal of Chubb Singapore (RM18m), gain on disposal of Ferrari operations in Australia (RM23m) and others loss (RM58m).

YoY, its 1QFY25 revenue rose 31% driven by strong industrials (+9%) and top-line contribution of RM4,385m from UMW (UMW contribution started in the 2QFY24), partially offset by lower automotive (-6%) sales.

Its industrial business has thrived due to strong commodity demand, leading to high equipment spending and after-sales. However, the prices for auto parts were lower due to unfavourable forex (translating to lower margins of 7% compared to 9% in 1QFY24 and YoY profit decline). Meanwhile, robust contributions from the newly-acquired Salmon Australia, Cavpower CAT dealership, and Onsite rental group helped to partially offset the lower margin.

Meanwhile, its automotive division was weaker at 31,371 units (-6%) across all markets due to stiffer competition from Chinese automakers.

In terms of geographical regions, Malaysia (-6%) was buoyed by strong order backlogs of new models, while in other markets such as Singapore, Thailand (+49%), China (-23%) and Australasia (-16%), sales were driven up by electric vehicles (EV). For Singapore, BYD is the market leader in the EV's market resulting in stronger growth over the other markets. Additionally, under UMW holdings, for 3QCY24, UMW Toyota & Lexus sold 27k units (-4%), while Perodua sold 89k units (+2%).

Its 1QFY25 core net profit rose 19% as consolidation of UMW's earnings helps to offset the weaker industrial and automotive segments.

QoQ. SIME's 1QFY25 revenue fell 3% due to weaker performance from industrials (-5%) due to the delay in equipment order (it received the order in October 2024) and automotive sales (-5%), partially offset by stronger contribution from UMW of RM4,385m (+6%) driven by Toyota and Perodua sales. Its core net profit fell 5% largely due to unfavourable sales mix and industrials' currency-related parts price reduction.

The key takeaways from its results briefing are as follows:

1. SIME reiterated its guidance for mid-single-digit margins for the industrial division. SIME holds the view that the commodity demand will remain strong leading to high equipment spending and after- sales, buoyed by the Australia's diversified export of metallurgical coal with India, Japan and South Korea as its main customers. It has a healthy order book of RM3.88b in 1QFY25, and has secured a contract to supply mining trucks worth RM798m in Australia in October 2024 which will increase its order book to RM4.7b by 2QFY25. SIME also guided that the currency-related parts price reduction should recover in the upcoming quarters. We keep our industrial margin assumption at 7% for both FY24 and FY25.
2. SIME shared that heavy price discounting drawback in the automotive market in China has started to seen green shoots of recovery in 1QFY25 as local government has started to regularise the industry (China region returned to pre-tax profit of RM6m in the 1QFY25 after three quarter of losses). Furthermore, SIME continues to lobby its BMW principal in China for better distribution margins as well as closing down non-profitable dealerships and showroom. It is looking to roll out higher- margin all-new models of BMW 520i M Sport (Malaysia), BMW i5 M60 (Australia), Volvo EX30 (China), Volvo XC90 (Malaysia), BYD M6 (Malaysia) and BYD Sealion 7 (Malaysia) to defend its margins.
3. SIME considers UMW as its third core business as it offers diversification with its presence in the mid-market segment (i.e. Toyota) and the affordable segment (i.e. Perodua), from SIME's predominantly premium offerings (i.e. BMW). UMW Toyota's CY24 unit sales target is 95k units (-12%) with backlog orders of over 20k units, while Perodua's CY24 unit sales target is 330k units (+0%) with backlog orders of over 90k units. It looks to divest its Komatsu business in 2QFY25 or 4QCY24, while remaining optimistic on the remaining business prospects under equipment business.

Forecasts. Maintained.

Valuations. We also maintain our SoP-derived TP of RM2.90 (see Page 3). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. We like SIME for: (i) the robust growth in its businesses, post economies reopening, (ii) the strong brands under its stable such as BMW, Caterpillar, Toyota and Perodua, and (iii) its attractive dividend yield of >5%. Maintain OUTPERFORM.

Risks to our call include: (i) governments cutting back on infrastructure spending on 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.

^ Gain on disposal of Malaysia Vision Valley (MVV) land (RM458m), Gain on disposal of Chubb Singapore (RM18m), Gain on disposal of Ferrari operations in Australia (RM23m) and others loss (RM58m).

Sum-of-Parts Valuation Segment Valuation (RM m) Basis Motors (excluding UMW) 5,624 6x PER Industries 12,467 9x PER UMW Holdings Bhd 6,270 13x PER Land Assets at Malaysia Vision Valley, Labu 2,959 8,040 acres @RM0.368m/acres or RM8.46/sq ft Subtotal 27,320 Net cash / (debt) -7,227 Total 20,093 No. of shares (m) 6,800 The rest of the page is intentionally left blank.

Source: Kenanga Research - 29 Nov 2024