PETALING JAYA: Sime Darby Bhd
is shifting its focus towards high-margin industrials, which offer around 7% margins, compared with the roughly 1% margin in its automotive segment.
The move comes amid strong demand for commodities and critical minerals and growing competition in the automotive market, alongside tariff restrictions.
This is among the takeaways from a recent corporate day held by the group.
In a report post the event, Kenanga Research noted that intense competition in both the Chinese and Malaysian automotive markets has weighed on Sime Darby’s profitability, with automotive margins narrowing to around 1% from 2% a year ago.
The research house said it could take several years for the group to rebuild market share and return the segment to stronger profitability.
“However, we believe that the challenging situation is already priced into the valuation, with China’s anti-involution policy coming into effect starting 2026, while Malaysia’s electric vehicle imported incentives will be discontinued starting 2026,” Kenanga Research added.
According to the research house, Sime Darby’s industrials segment has been the main earnings driver, contributing 50% of the group’s pre-tax profit despite accounting for just 27% of total revenue.
The segment benefits from strong commodity demand in Australia’s mining sector, with northern operations led by Hastings Deering and southern operations by Cavpower.
Overall, Australasia accounts for 74% of the group’s industrial revenue.
It said with Caterpillar raising parts prices in July 2025 and high-margin after-sales accounting for around half of its industrial mix, the group is well-positioned to capitalise on growing demand from Australia’s critical minerals mining sector.
Sime Darby is the authorised distributor for Caterpillar in certain regions of Australia.
Australia has a leading critical minerals mining sector, with large deposits of lithium, rare earth elements, cobalt, and zircon, among others.
The government is actively developing the industry through strategic partnerships.
Over a five-year horizon, the research house sees the Permodalan Nasional Bhd-backed group’s industrials business deserving a higher price-to-earnings ratio (PER) of 13 times, up from the current eight times.
Kenanga Research has raised the stock’s target price by 42% to RM2.70 from RM1.90.
However, it said the ascribed PER of 13 times is conservative, below peers’ financial year 2027 (FY27) forecasts, reflecting a more cautious view compared with high-cycle growth levels seen in the sector.
Meanwhile, Hong Leong Investment Bank (HLIB) Research said Sime Darby has outlined a strategic roadmap to lift return on equity to 11% by 2030, from 6.2% to 7.2% in FY22 to FY25, which would translate into profitability of over RM2bil versus the current RM1.4bil.
This would be driven by various optimisation initiatives.
The research house said the group’s industrial segment is well positioned to benefit from the accelerating development of data centres in Malaysia, Singapore, and China, as Caterpillar is a global supplier of power systems.
It is also committed to its 50% dividend payout policy, with potential for special dividends following asset disposals.
“We forecast a core dividend of 13 sen and a possible special dividend of one sen for FY26, implying an attractive dividend yield of over 6%.
“We maintain our ‘buy’ recommendation with an unchanged target price of RM2.50, based on a 15% discount to the sum-of-the-parts of RM2.94,” HLIB Research said, adding that there could be further upside as its target price is conservative.
A trader said the stock could deliver attractive dividend yields of 7% to 7.4% for this year and next, assuming a 75% payout ratio.
Potential re-rating catalysts include stronger contributions from UMW Holdings Bhd, higher market share in Australia’s mining sector, recovery in Chinese automotive margins, and monetisation of land assets.
