• Maintain BUY, new MYR3.15 TP (SOP) from MYR2.85, 20% upside, c.5% FY24F (Jun) yield. 1HFY24 largely met both our and Street's full-year forecasts. Post-acquisition of UMW, we believe Sime Darby is now undervalued, trading at 10.9x CY24 P/E – below its historical mean of 13x.

• SIME's MYR594m 1HFY24 core earnings were largely in line with our and Street’s expectations of full-year FY24 forecasts. It declared a 3 sen DPS, which translates to a c.25% payout ratio or 1% yield. We maintain our FY24 DPS of 13 sen.

• The 2QFY24 motor segment’s PBIT rose 27% YoY, bringing 1HFY24 PBIT to MYR395m (+21% YoY). The YoY rise in 2QFY24 was largely contributed by SIME’s Malaysia motor business (+84% YoY), driven by higher volumes sold (+46% YoY) and elevated units assembled. This was offset by the China motor business, which recorded a MYR16m loss (2QFY23 PBIT of MYR15m), as the price war rumbled on while ASPs declined 3% YoY.

• Solid Industrial results. SIME’s industrial segment recorded a PBIT of MYR351m (+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 c.15% of Australasia’s industrial PBIT in 1HFY24.

• UMW results. UMW’s FY23 earnings doubled to MYR835m (FY22: MYR415m) thanks to record high sales from Perodua (+41%) and Toyota/Lexus (+14%). While we remain neutral on the post-acquisition synergies in the short term, we believe the addition of mass market brands to SIME’s offerings strengthens its presence in the local auto market.

• Outlook. We 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 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’s overall earnings base moving forward.

• We lift our FY24F-26F earnings by 17-22%, mainly due to the consolidation of UMW, while we cut our bottomline estimates for China (both industrial and motor segments), given the continuing weak sentiment there.

• Keep BUY with a higher SOP-based MYR3.15 TP with a 2% ESG discount. We now factor in UMW into our SOP valuation, with a previously ascribed 14x target P/E. Post the acquisition, SIME is undervalued – it is currently trading at 10.9x CY24F P/E vs its historical mean of 13x.

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

Source: RHB Research - 22 Feb 2024