KUALA LUMPUR: CIMB Equities Research is retaining its Reduce and target price for Sime Darby with an unchanged sum-of-parts based target price of RM2.38.
It said on Wednesday the potential de-rating catalysts include weaker-than-expected auto and heavy equipment sales and profit margins. The key upside risks to the reduce call include better-than-expected earnings.
Sime is upbeat about stronger growth in industrial division, driven by an uptick in mining recovery cycle in Australia and robust demand from construction in China.
The group expects a boost in vehicle volume growth in June 2018 due to tax holiday in Malaysia; it expects the demand to ease once the government introduces Sales and Service Tax (SST).
“Sime is exploring the potential sale of its logistics assets in China so it can stay focused on its core expertise.
“We believe the current share price valuation already reflects its improving earnings prospects, with the stock trading at CY19F P/E of 20.5 times,” it said.
CIMB Research said Sime Darby is upbeat on the near-term outlook for its Malaysian motors division, pending the reduction in Goods and Service Tax (GST) rate from 6% to 0% on June 2018.
The group saw an increase in new vehicle bookings in recent weeks and it expects to see bumper sales volumes in June 2018.
“While we agree with the management that vehicle demand is expected to pick up in the near term due to the tax holiday, we expect sales volume to ease once the new government reintroduces the sales & service tax (SST).
“Management is excited about the new BMW engine assembly plant in Kulim. The engine assembly plant is the second production facility for BMW in Southeast Asia, after the Rayong plant in Thailand.
“The new facility will help to raise the localised content from 30% to over 40%, allowing BMW to export the locally assembled vehicles across Asean,” it said.
Nevertheless, CIMB Research understands the existing 10,000 per annum capacity will only be enough to meet local demand and it may need to invest in a second line to cater for exports.
As for the industrial division, the core PBIT fell by 47% on-quarter in 3QFY18 due to the charge-out of parts for service jobs in Australia, which are no longer recoverable.
The group attributed the cost to a glitch in its software system, but it has rectified the issue with new software updates.
Overall, Sime incurred RM43mil charge-out of parts for service jobs in 9MFY18.
The group reiterated its plans to sell non-core assets. For example, it is exploring the potential sale of its logistics assets in China but maintains that the process remains in the early stages.
The group’s logistics assets comprise Weifang Port, three river ports in Jining and two water treatment plants located in the Binhai Economic-Technological Development area.
For 9MFY18, logistics division’s core profit before interest and tax rose 69% on-year to RM61mil.
“We value the logistics division at one time FY6/17 invested capital of RM2.3bil,” it said.