Review

• Sime Darby Bhd (SIME)’s 3QFY24 results came in above expectations. The outperformance was mainly driven by a higher-than-expected profit contribution from UMW and the Industrial division. Excluding all exceptional items, the core net profit increased 60.8% YoY to RM426mn on the back of a 63.4% rise in revenue.

• Cumulatively, 9MFY24 core net profit increased by 35.3% YoY to RM1.0bn, supported by a 38.1% increase in revenue.

• Automotive – For 9MFY24, PBIT increased 15.7% YoY to RM575mn, driven by a 20.1% surge in revenue. This improvement was mainly due to higher profit from Malaysian operations (+72.8% YoY) and Singapore (+82.5% YoY), which offset lower contribution from China and Australasia. It's noteworthy that the China operation incurred a loss of RM18mn compared to a profit of RM87mn recorded last year, largely due to low margins. Despite this, overall unit sales grew by 26.7% YoY to 107.2k units.

• Industrial – 9MFY24 PBIT surged by 58.0% YoY to RM1,068mn, primarily propelled by higher profits from Australasia. Notably, this region registered higher profits from the product support and mining equipment segments, along with contributions from Onsite Rental (acquired in April 2023) and Cavpower (acquired in Nov 2023).

• UMW – 9MFY24 PBIT contribution from UMW amounted to RM309mn. Note that the business segments under UMW include Automotive, Equipment, Manufacturing and Engineering and others.

• No dividend has been declared for the quarter under review.

Impact

• We adjust our earnings estimates for FY24 - FY26 upward by 1.7% to 13.2%, after factoring in higher-than-expected contribution from UMW and the Industrial division.

Outlook

• The industrial division is expected to perform well, premised on the robust order book in Australia from the mining and construction sectors.

• However, management indicated that the group continues to confront challenging business conditions in China, along with cost inflationary pressures and persistent high interest rates, especially in Australasia.

• We expect automotive sales in China to continue to be impacted by a brutal price war, especially in electric vehicles (EVs), which show a slow pace of growth. Management foresees these price wars persisting, further impacting margins in a saturated market.

• The intention to dispose of the Komatsu business unit under UMW is still ongoing. Note that Komatsu and Caterpillar (Sime is the exclusive dealer in some regions) are competitors in the heavy machinery industry segment.

• The current outstanding bookings for UMW Toyota Motor (UMWT) and Perodua have seen a further slowdown, totalling about 23k unis and 100k units, respectively, compared to the 28k units and 128k guided in the last quarter. There is no change to the 2024 sales target volume of 95k units (- 12% YoY) for Toyota and Lexus vehicles.

• Meanwhile, management does not anticipate diesel fuel rationalization to have a significant impact on Toyota's commercial sales volume.

Valuation

• Maintain SIME as BUY with a higher TP of RM3.27/share (previously RM2.84), based on sum-of-parts (SOP) valuation.

Source: TA Research - 24 May 2024