CIMB Research noted that the group was focused on improving its financial performance despite headwinds.
PETALING JAYA: Sime Darby Bhd
is targeting a higher return on equity (ROE) of 11% within the next five years, up from 7.2% in the financial year ended June 30, 2024 (FY24), as it seeks to optimise working capital, streamline its portfolio and enhance cost efficiencies.
The group remains optimistic about its prospects, underpinned by Asia-Pacific’s consumption growth and a more balanced portfolio following the integration of UMW Holdings Bhd.
CIMB Research, which attended Sime Darby’s Investor Day in Kuala Lumpur recently, noted that the group was focused on improving its financial performance despite headwinds such as China’s economic slowdown and a higher interest rate environment.
“Sime Darby is targeting an 11% ROE over the next five years (FY25 to FY30), up from 7.2% in FY24, through key initiatives such as working capital management, a higher-margin portfolio, capital expenditure (capex) and cost optimisation, and the closure of non-performing businesses,” the research house wrote in its report.
CIMB Research reiterated “buy” on Sime Darby, with an unchanged target price of RM3, based on 14 times price-earnings ratio in line with its historical mean.
It noted that despite challenges, Sime Darby managed to maintain an average core ROE of 7.2% in FY23 and FY24.
CIMB Research observed that the turnaround of Sime Darby’s China motors operations and the potential divestment of non-core assets could accelerate the company’s progress towards its 11% ROE target.
“We believe the turnaround of its China motors operations and potential divestment of non-core assets could accelerate Sime Darby’s progress toward its 11% ROE target – ahead of our forecasts of 7.3% to 7.8% for FY25 to FY27,” it said.
The outlook for the group’s industrial division in Australia remained robust, driven by strong demand in the rental and after-sales segments, which contributed 63% of the division’s revenue in FY24, compared with 49% in FY20.
CIMB Research attributed this growth to the acquisition of Onsite in April 2023 and a strategic focus on aftermarket services.
“We view the group’s strategy to expand its rental and after-sales business favourably, given its higher margins and ability to mitigate the impact of miners’ capex reductions during economic downturns,” it stated.
The acquisition of Cavpower in November 2023 has also provided strategic diversification into copper, with gold and copper now accounting for 7% of industrial revenue in FY24, up from 4% in FY23, it added.
The China motors division is expected to recover in FY25, supported by financial rebate assistance from its principal partner.
The division’s challenges stemmed from losses at new greenfield dealerships, which reported a wider RM184mil loss before interest and tax (LBIT) in FY24, compared with LBIT of RM94mil in FY23.
However, discussions were ongoing for additional rebates to accelerate the turnaround.
“Encouragingly, the China motors division posted a core profit before interest and tax of RM6mil in the first quarter of FY25 (1Q25), marking a turnaround after three consecutive quarters of losses in 2Q24 to 4Q24 ranging from RM16mil to RM105mil,” CIMB Research said.
It noted that Sime Darby is also optimistic about the upcoming BMW Neue Klasse electric vehicle, which is set for production in 2026 with a strong focus on the Chinese market.
CIMB Research projected a modest three-year core net profit compounded annual growth rate (CAGR) of 7%, broadly in line with the 2019 to 2024 net profit CAGR of 6.7%.
The research house said it likes Sime Darby for its commendable dividend yields of 6.9% and 7.3% in 2025 and 2026, respectively (based on an average dividend payout of 70%).
Overall, CIMB Research viewed Sime Darby’s earnings-accretive acquisition of UMW Holdings, its position as a proxy to the Australian mining sector, and its potential asset monetisation initiatives as key positives.
“We like Sime Darby for its earnings-accretive acquisition of UMW Holdings, its attractive position as a proxy to the Australian mining sector, and potential monetisation of non-core and land bank assets,” it said.
