KUALA LUMPUR: Most businesses are grappling to stay afloat as they confront uncertainties through and beyond the Covid-19 pandemic.
But there are some businesses that have quickly responded to the changes during this period.
The companies moved early to rationalise their balance sheets to improve cash flow as well as cutting back from non-core businesses to mitigate the impact of the pandemic.
One such company is Malaysia’s oldest and diversified conglomerate Sime Darby Bhd.
The conglomerate was already in a good position to manoeuvre through the crisis, as only 10% of its group revenue stems from Malaysia, while the remainder is from the overseas market, according to the third quarter ended March 31 (Q3’21) financial results. With Sime Darby’s presence in different markets, its financial strength lies in its ability to manage capital given the different demand of the markets and their differing taxation, rules and regulations.
The group’s “downturn action plan” that aims to conserve cash and improve cash flow is the key strategy that was implemented since the beginning of the pandemic more than a year ago.
According to Sime Darby Bhd group chief financial officer Mustamir Mohamad, effective management of the group’s cash flow was critical during the pandemic to ensure there was sufficient cash for its various businesses.
“This was possible thanks to our diligent management of cash flow across territories, and in working with our operating units across the group, ” he told StarBiz.
It is also important to note, that the group has progressed its non-core rationalisation plan.In the last eight months, Sime Darby sold its stakes in Tesco Malaysia, Eastern & Oriental as well as Jining Ports.
Besides streamlining its portfolio, Mustamir says the conglomerate has been also working to improve efficiencies of its businesses, by harnessing data for improved productivity.
“The move helped to extract more value from our existing operations.
“The cost improvements and focus on operating efficiencies have helped towards improving our profit before interest and tax margin from 2.5% in financial year (FY17) to 5.3% for the nine-month period ended March 31, 2021, ” he pointed out.
In the Q3’21, the group’s net profit jumped more than double to RM300mil from a year ago on the back of strong performance of the motors division, particularly in China.
The initiatives were also reflective in the group’s operating cash flow which improved significantly to RM2.6bil in the nine months FY21 from RM1.2bil a year ago bolstered by higher profits from operations and improved working capital management, particularly on inventory management.
The improved cash flow, as a result of better working capital management, has also helped to reduce borrowings and increase debt capacity.
As of March 31, the group’s gearing ratio stood at 0.2 times.
Despite the almost RM1bil used for acquisitions in FY20 and setting up new motor dealerships in China, the group’s gearing level is still relatively low, providing headroom to gear up further for expansion.
“Considering the fact that the sectors we are in require significant investment to keep abreast of new technology and changing trends, the group’s capacity to gear up further to fund expansion positions us favourably in the market in terms of acquisitions, ” he said.
Increasing the group’s debt capacity would allow for more investments in businesses with higher returns, according to Mustamir.
“Sime Darby is clear that we take on debt only when we can ensure optimal value for the group, which is that the returns from the investments need to exceed the cost of capital.
“This is done after a thorough evaluation of the prospects of the business we look to invest in, ” he said.
At the current gearing level, Mustamir noted that debt is the preferred mode of financing as opposed to utilising cash as it is presently significantly cheaper than equity and the interest is tax deductible.
Strengthening the group’s balance sheet would also in turn improve its return on invested capital (ROIC).
In the past, the group has always focused on improving its ROIC through initiatives such as cost optimisation on overheads, improvement of working capital, disposal of non-core assets as well as increasing revenue from aftersales and used car to improve overall margins.
Given that Sime Darby’s capital allocation framework that sets guidelines on investment thresholds and where to focus its investments, Mustamir says the group will optimise its capital allocation to result in greater returns to shareholders.
For FY21, Sime Darby expects to bring in a return on equity based on core profit improvement of above 7%, up from 5.5% in FY20.
“Sime Darby Bhd has a fairly high dividend payout ratio and yield. We are considered a dividend stock with good supporting growth factors due to our exposure to the China luxury market and the commodities cycle, ” said Mustamir.
For nine-month period, the group forked out about RM390mil on capital expenditure, of which the majority was spent in the motors division mainly on new BMW and Volvo dealerships, particularly in China.
Sime Darby’s action plan would continue to take place with the group managing its cost and increasing efficiency to improve its cash flow. However, business expansion and growth are equally crucial to the group as it plans to expand further in the region.
“We also have plans to expand in new markets such as India and Indonesia to capture the emerging growth in these markets.
“In the mining sector, we plan to grow by stretching ourselves along the value chain, and doing more with our existing customers, ” he added.
Clearly, the conglomerate’s diversified footprint and a stronger balance sheet has allowed it to tap on the Asian growth story amid the pandemic.