Review

• Excluding exceptional items, Sime Darby Berhad (SIME) reported a 15.1% YoY decline in 1QFY25 core net profit, which was in line with expectations. The weaker performance was primarily attributed to reduced margins, higher financing costs, and increased tax expenses (driven largely by the Real Property Gains Tax (RPGT) on land disposal).

• Automotive – In 1QFY25, PBIT decreased by 6.4% YoY to RM190mn. After excluding the exceptional items, core PBIT declined by 17.7% YoY to RM167mn. The weaker performance was mainly driven by reduced profit contributions from all operating regions, except Singapore, which recorded higher profits due to increased EV sales. In China, the intense competition continued to pressure vehicle margins. Overall, total unit sales fell by 6.1% YoY to 31.3k units.

• Industrial – In 1QFY25, PBIT declined by 4.2% YoY to RM343mn, primarily due to the impact of reduced parts pricing despite increased mining and construction equipment deliveries in the Australasia region. In China, profits were affected by a slowdown in the construction industry, while Malaysia faced challenges from lower allied equipment deliveries and minimal project milestone revenue recognition in the energy services sector.

• UMW – In 1QFY25, UMW contributed RM214mn to PBIT. Note that the business segments under UMW include Automotive, Equipment, Manufacturing and Engineering and others.

• No dividend was declared for the quarter under review.

Impact

• No change to our earnings forecasts.

Key Takeaways from the Analysts’ Briefing

• The Motors operations, particularly in China, continue to face strong competition and cautious consumer behaviour. To capture market share, the significant discounts are expected to persist.

• China’s motor operations turned positive in 1QFY25 after the group shut down several underperforming outlets and brands. Cost-saving measures are also being implemented as part of this strategy.

• The automotive division in Malaysia is expected to face increased competition with the entry of Chinese EVs into the market, including both EV and ICE vehicles.

• In the industrial division, the order book decreased by 14.1% QoQ to RM3.8bn as of 30 Sept. However, the order book rebounded to around RM4.4bn in October, mainly driven by the mining and construction sectors in Australia. In China, the overall market remains challenging and uncertain, despite various stimulus measures aimed at restoring confidence.

• Perodua’s current outstanding bookings have dropped to 90k units, down from an estimated 100k in August 2024. It’s first EV is expected to be priced under RM100k and is set to launch by the end of 2025.

• The divestment of Komatsu shares to Komatsu Ltd. was completed in October 2024. While SIME did not gain from the disposal, it did incur a slight loss due to transaction costs.

Valuation

• Maintain SIME’s TP at RM2.74/share, based on sum-of-parts (SOP) valuation. The share price has dropped by 13.8% from its three-month high, presenting a great opportunity for investors to accumulate the stock. With a potential upside of over 12%, we have upgraded our recommendation for SIME from Hold to BUY.

Source: TA Research - 29 Nov 2024