Sime Darby to see slowdown in motor segment
KUALA LUMPUR: Sime Darby Bhd’s (Sime Darby) motor segment is expected to experience a slowdown in the near-term despite several launched earmarked in 2019.
In a report by AmInvestment Bank Bhd (AmInvestment Bank), it expected the segment to slow down due to changes in the global macro environment.
“Recall that China announced a cut in import tariffs from 25 to 15 per cent in July last year. The import duty reduction on US cars was officially implemented on January 1, 2019. We understand that this will is for a temporary period of three months.
“Reacting to this, BMW dealerships in the region have lowered their vehicle prices to compete with the lower selling prices of imported cars. This has directly impacted the group’s margins which are already slim for this segment,” explained the bank.
The groups management has also guided that there will be several new launches this year, which includes its best-selling 3-series that is expected to be released this month.
While the new launches are expected to cushion the decline of the reduced sale figures in China, the bank commented that they still expected Sime Darby’s motor segment to remain sluggish with revenue and margins erosions anticipated in the near-term.
Meanwhile, the group continues to rely on the industrial segment as the key foundation to support its earnings.
At the end of the second quarter of financial year 2019 (2QFY19), the group reported an impressive orderbook of RM2.5 billion with 61 per cent from Australia, and management guided that orderbook replenishment remains healthy.
Besides this, demand for Caterpillar equipment has also been strong as it is driven by strong coal prices backed by infrastructure development in emerging markets such as China, South Korea and India.
And worries of China’s economic slowdown doesn’t seem to be an issue as the bank notes that Sime Darby’s industrial segment has healthy diversification of revenue with orders from China accounting for only 25 per cent of the segment’s revenue.
“Hence we expect this segment’s revenue to remain strong,” said the bank.
Looking at the group’s healthcare segment, the bank reports that its management is expecting longer-term growth prospects despite the present low earnings contribution to the group.
“Sime Darby is opting to avoid expansion through M&As given the excessive valuations for companies in the healthcare sector.
“With the organic expansion route, the group plans to build hospitals in future townships launched by PNB-related property developers. Although this is viewed positively, any meaningful contribution to the group’s earnings from these expansions is only expected to be seen in the longer term.”
All thing considered, AmInvestment Bank is maintaining ‘hold’ on Sime Darby with unchanged sum-of-parts based fair value of RM2.33 per share and a PER of 12-fold for its motor segment.
“We see no major catalysts for now to drive Sime apart from its continued strength in the industrial segment. We remain concerned about the group’s near-term growth prospects as we expect the motor segment to continue to be weak,” justified the bank.