KUALA LUMPUR: CIMB Equities Research has cut its earnings per share for Sime Darby for FY18 to FY20 by between 2% and 9% to reflect a lower profit before interest and tax (PBIT) margin in the industrial division due to a reduction in service and maintenance jobs.
However, it said on Monday that it still expects stronger equipment demand to drive Sime’s earnings growth in the near term.
“We see downside risk for Sime in the medium term in view of a potential slowdown in equipment demand in Malaysia following the Pakatan Harapan government’s plans to review major construction projects,” it said.
Following its earnings revision, CIMB Research’s sum-of-parts based target price has been reduced to RM2.38.
“We maintain our Reduce rating on the stock. Potential de-rating catalysts include weaker-than-expected auto and heavy equipment sales and profit margins as well as disappointment in the group’s ability to create shareholder value following the demerger. The key upside risks to our Reduce call are better-than-expected earnings,” it said.
Commenting on the results, CIMB Research said Sime Darby’s third quarter ended March 31, 2018 (3QFY6/18) core net profit fell by 22% on-quarter due to lower industrial and logistics contribution.
Industrial core PBIT dropped 47% on-quarter due to the charge-out of parts for service jobs, which are no longer recoverable.
Sime Darby’s logistics division’s core PBIT fell 28% on-quarter due to lower sales as a result of the Chinese New Year holidays and environmental controls undertaken by local authorities, which reduced Jining port’s operating time.
The 9MFY18 core net profit rose 73% on-year, driven by higher contribution across all divisions, led by industrial.
The industrial division posted 62% on-year core PBIT growth due to higher equipment delivery and product support sales in Australia and China on the back of an uptick in the mining cycle.
The motors division also posted 15% on-year growth in core PBIT, driven by higher sales volume and a better sales mix in North Asia markets and the divestment of loss-making Peugeot and Citroen operations in Australia.
Although Sime experienced a sequential decline in industrial division PBIT in 3QFY18, the group remains optimistic it will see stronger PBIT contribution in the coming quarters, fuelled by growth in its order book value to RM2.3bil in March 2018 (RM2.2bil in December 2017 and RM1.4bil in March 2017).
The group attributed the healthy order book replenishment to the uptick in mining cycle in Australia and expanding coal mining activities in East Malaysia.
Sime also launched its new RM132mil BMW engine assembly plant in Kulim in early-May 2018.
The group is excited about the new facility as it will increase the local content of its cars, making them more competitive in the domestic market.
“We understand the facility will have a 10,000 unit a month production capacity on a single shift and the group can raise production volume to 20,000 unit a month by adding a second shift,” said CIMB Research.
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