SIME DARBY BHD
By CIMB Research Reduce (maintained) Target price: RM2.42
POST-meeting with the management, CIMB Research expects Sime Darby Bhd to ride on mining demand recovery moving forward.
The research firm said that the uptick in Australia’s mining activity and the robust demand from Belt and Road initiatives in China will be positive for the group.
“The industrial division posted an impressive 115% surge in core profit before interest and tax (PBIT) from RM106mil in the first half of financial year 2017 (H1’17) to RM228mil in H1’18, driven by higher mining activity in Australia and China.
“To recap, the total industrial division order book increased by 64% year-on-year (y-o-y) from RM1.4bil in Dec 2016 to RM2.2bil in Dec 2017. The group expects the recovery in mining activity in Australia to continue to pick up with the uptick in the mining cycle,” said CIMB Research in a note.
The research house pointed out that there will not be further impairment and inventory writedowns related to Sime Darby’s decision to exit the motor business in Vietnam.
The group’s core net profit in 1H18 rose 89% y-o-y after stripping out non-core items such as the RM184mil exit cost for the Vietnam motor business, RM215mil gain on property disposal, RM85mil asset writedown for deconsolidation of Yayasan Sime Darby and RM24mil net forex gain.
The motor division’s core PBIT rose 20% y-o-y to RM269mil in 1H18, driven by higher sales volume in North Asia and stronger profitability from Australia and New Zealand due to the cessation of the loss-making Peugeot/ Citroen business.
Sime Darby is exploring potential sales of its logistics assets in China, which is currently in the early stages, according to CIMB Research.
“The group’s logistics assets comprise Weifang Port, three river ports in Jining and two water treatment plants located in the Binhai Economic-Technological Development area. We currently value the logistics division at FY17 invested capital of RM2.3bil,” it said.
CIMB Research maintained its “reduce” rating on the stock, with an unchanged target price of RM2.42.
“Potential de-rating catalysts include weaker-than-expected auto and heavy equipment sales and profit margins as well as disappointment over the group’s ability to create shareholder value following the demerger,” said the research house.