KUALA LUMPUR: AmInvestment Research is maintaining its “hold” call on Sime Darby Bhd with an unchanged sum-of-parts based fair value of RM2.64 a share, based on forecast financial year 2021 price-earnings of 11 times for its motor segment.
The research unit said in its latest report that Sime Darby’s share price is seen as fairly valued at current levels with limited upside.
Sime Darby management said the ongoing protest against the local government in Hong Kong, which started end-March, has disrupted its vehicle sales.
However, the shortfall from Hong Kong’s sales is expected to be mitigated by improved transactions in the China region earlier this year from the launch of the new BMW 3- and 5-series.
“With that, we expect overall total vehicle sales in the region for financial year 2020 (FY20) to be flattish.
“Going forward in FY20, we still expect Sime Darby’s China automotive division to remain sluggish as margins will continue to erode due to the prolonged heavy discounting given by BMW vehicles in order to remain competitive in the region due to the ongoing trade tensions.
“In FY19, the core profit before interest and tax contribution in China-Hong Kong region was at 38% while in Malaysia, it stood at 40% for the automotive segment, ” it said.
As for metallurgical coal prices, AmInvest has a clear correlation to the demand for equipment, parts and services for Sime Darby’s industrial division.
Even though there is a dip from its 2019 peak of US$195 per tonne in May to a recent low of US$148 per tonne, it is still well above the breakeven point at US$80 per tonne.
“With that said, we are expecting another compelling growth for the Australasia region in FY20 due to two main reasons – demand for both mining equipment replacements is still growing as the coking coal prices continue to remain above the breakeven point; and Sime Darby’s intention to continue expanding the services segment in heavy equipment as it provides better profitability margins for the group, ” it said.
After losing out on the Columbia Asia deal following a bid against the Hong Leong Group, Sime Darby is still looking to expand its healthcare segment.
The group is aware of the pumped-up valuations of the healthcare industry if it chooses to expand via merger and acquisition.
The group guided that it has allocated RM5bil for expansion (of all segments) over the next five years.
“We look forward for Sime Darby expanding its healthcare segment in tandem with the rising affluence in Malaysia, ” the brokerage said.
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