Sime Darby rides on Caterpillar

The distributor of Caterpillar heavy equipment profits from US brand’s strong performance

Caterpillar Inc, the world’s number one manufacturer of heavy equipment and power systems, has been a solid performer for local conglomerate Sime Darby Bhd for many years.

The US-based Caterpillar Inc recently posted a 31% higher revenue for its first quarter of 2018, surpassing analyst estimates.

However, it was reported that Caterpillar Inc has cautioned that the first-quarter earnings were a “high watermark” for the year, due to growing costs and investments.

The management of Caterpillar Inc has guided that it will not be able to have the same pricing power going forward, in order to pass on the increased material cost.

In March, US president Donald Trump announced trade tariffs on imported aluminium and steel on as much as US$150bil of Chinese goods.

Sime Darby is the world’s third largest Caterpillar dealer, with more than 110 branches in nine countries and three territories in Asia Pacific.

It is also the sole distributor of Caterpillar equipment in seven provinces in China.

Sime Darby’s dealerships with Caterpillar are via Australia-based Hastings Deering Group, China Engineers Ltd, Tractors Singapore Ltd and Tractors Malaysia.

For the second quarter ended Dec 31, 2017, Sime Darby registered a profit before interest and tax of RM495mil, of which the industrial segment constituted RM146mil.

This marks a 165.5% increase compared to the corresponding quarter last year, mainly due to higher equipment deliveries and product support sales to the construction and mining sectors in Australia and China.

According to a recent report by AmInvestment Bank, Sime Darby’s industrial segment will be supported by an 18-month backlog of orders in Australia, driven by an uptick in the mining cycle.

As of end-December, the order book for the industrial segment amounted to RM2.2bil, with close to two-thirds coming from Australia.

“However, growth in its other markets such as China, Malaysia and Singapore will be moderate, as builders could opt for non-Caterpillar equipment, while the South-East Asian oil and gas service providers are still refraining from heavy capital expenditure (capex) spending,” the research house says.

As for the conglomerate’s automotive segment, the budgeted capex of up to RM2bil over the next five years will cover two short-term priorities, namely, acquiring BMW dealerships in China as well as adding more service centres in Malaysia to reduce waiting time for customers.

To date, Sime Darby has 11 BMW branches and a 5% market share in China.

Meanwhile, the research house opines that the divestment of Sime Darby’s logistics segment could begin with the sale of the Weifang water asset.

The asset has a book value of RM270mil, which translates to a return of four sen per share.

AmInvestment Bank believes Sime Darby could opt to retain this amount, considering that a merger and acquisition seems to be the clearest path for its business segments.

It adds that Sime Darby is in a comfortable position to leverage up, given its gearing of 0.08 times, on a net debt position of RM1.2bil, with 90% of its borrowings being short-term due to its trading businesses.

Apart from that, Sime Darby owns an 8,800-acre parcel of land in Malaysian Vision Valley, acquired from Sime Darby Property for RM2.5bil as part of a settlement for inter-company loans.

According to AmInvestment Bank, Sime Darby expects to sell parcels of the land to developers of the KL-Singapore high-speed rail in the next few years, and has decided not to develop the land on its own.

Additionally, Sime Darby could also sell parcels of the land to Sime Darby Property, which is jointly developing Malaysian Vision Valley over a 30-year period.

“We believe the group is approaching the expansion of its core segments and divestment of non-core assets in a thoughtful and measured way.

“We project the group’s net profit to grow by 2% to 10% annually in the next few years, premised on the strength of its BMW dealerships in the key markets of China and Malaysia, and the return of its industrial segment to solid ground,” says AmInvestment Bank.

Bloomberg data shows that analysts covering Sime Darby have two “buy”, four “hold” and five “sell” calls on the counter.

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