• Maintain BUY, new MYR2.85 TP (SOP) from MYR2.50, 20% upside,c.6% FY24F (Jun) yield. 1QFY24 net profit beat our and Street's full-year forecasts at 27%. Driven by EV sales, Sime Darby’s Malaysia and Chinamotor segments should remain resilient despite macro economic headwinds. Its Australasia industrial segment’s contribution continues to grow following its recent acquisitions.

• Results beat. SIME's MYR325m 1QFY24 core profit beat our and consensus expectations at 27% of full-year FY24 forecasts. This was due to stronger-than-expected performances across all segments.

• The motor segment’s PBIT rose 15% YoY, largely contributed by its Malaysia motor business (+88% YoY), driven by higher volumes sold(+65% YoY) and units assembled (+43% YoY). This was offset by China motor business, which declined 60% YoY in the midst of a stiff price war. This has resulted in ASPs declining 9%.

• Industrial results. SIME’s Australasia market, which made up the bulk or86% of its 1QFY24 industrial PBIT, rose 66% YoY thanks to elevated spare parts and services revenue, as well as higher-margin contributions from its Onsite Rental acquisition. The latter contributed MYR38m at PBIT level, ie>10% of Australasia’s industrial PBIT. With the recently concluded acquisition of Cavpower, we believe this unit will record solid numbers in the coming quarters.

• Outlook. We continue to expect the industrial division to chart robust numbers, supported by the anticipated Cavpower earnings on top of contributions from Onsite Rental. We remain cautious on the China motor and industrial units given the relatively weak economic outlook there. We estimate SIME’s car sales will soften 4% YoY in China, mainly weighed by the continuing stiff price war from Chinese marques. That said, we expect margins to gradually recover. In Malaysia, we expect the motor segment to remain resilient, driven by a series of new EV launches.

• We lift estimates by 9-10% as we tweak our car ASPs in Malaysia, and car sales volumes here and in China. We also increase the industrial division’s contributions for Australasia, supported by Onsite Rental and Cavpower.

• Keep BUY with a higher MYR2.85 TP as we roll forward our valuation to CY24F. Our TP includes a 0% ESG premium/discount, which implies 14xCY24F P/E, which we believe is where this stock deserves to be traded at– ie higher than historical mean of 11.6x P/E – considering that the proposed acquisition of UMW (UMWH, NEUTRAL, TP: MYR5) will be earnings accretive to SIME, in our view.

• Key risks: Weaker-than-expected margins, softer-than-expected car sales across its markets, and a longer-than-expected downturn in China.

Source: RHB Securities Research - 28 Nov 2023