What happened after the demerger

RECENTLY, Starbizweek met up with Sime Darby Bhd CEO Datuk Jeffri Salim Davidson (pic) at Sime Darby’s new headquarters in Ara Damansara. Nearly two years after its mega three-way demerger, Sime Darby is now a totally different company.

Excerpts of the interview:

Going back to the early days of the demerger, what went through your mind about the group being carved out and left with these businesses?

The demerger has enabled Sime Darby to focus on the core trading businesses of motors and industrial, along with healthcare.

I have been with Sime Darby for many years and came up through the industrial division. The industrial segment is a cyclical business and if you average it out over a 10-year cycle, the returns are quite good. This is similar to the motors division.

Taking a step back, Sime Darby is a true Malaysian multinational, having established a strong footprint via our industrial and motors divisions across the Asia Pacific, with 85% of our revenue being generated outside Malaysia.

In our motors division, we are one of the world’s largest BMW dealers. Similarly, our industrial division is one of the largest Caterpillar dealers in the world. This year, we are celebrating our 90-year milestone as a Caterpillar dealer.

Since the demerger, our share price has been trading above the reference price of RM1.85, a testament of investor confidence in the performance of the company.

When you said the trading business is in a cyclical industry, which sector would impact your business, moving forward?

This would be the mining and construction sectors. In terms of prospects, strong and sustained coal prices will continue to spur growth in the mining industry in Australia, while in China, we expect to see further spending in infrastructure, which would benefit our industrial division.

Two-thirds of our business in Australia is in coal mines, specifically metallurgical coal. Our Caterpillar dealership in Australia services the Queensland and Northern Territory regions.

The mining sector peaked in 2012 in Australia. This was followed by a downturn in the years after as mines struggled with low commodity prices and old machinery.

Coal prices have recovered since then and the mining sector has seen on an uptick. We have a solid order book for mining equipment for financial year 2019 (FY19) and FY20.

There have also been indications of large miners injecting capital to expand production. Within Queensland, five new areas have been announced for metallurgical and thermal coal exploration.

What is the impact of the Us-china trade war on Sime Darby?

So far, we have seen a limited direct impact on our business. For our industrial business in China, 95% of Caterpillar machines are manufactured in China. Similarly, for our motors business in China, about 75% of the BMWS we sell there are made in China.

While we see that there is a slowdown in vehicle volume for the mass market, the luxury and super-luxury car markets are still strong in China.

Additionally, we foresee that with the slowdown in economic growth in China (following the trade war), the Chinese government may increase infrastructure spending to prop up the economy. This may, in turn, benefit our industrial segment as we service the construction sector in China.

Our total unit sales in China have increased by 28% compared with FY18, despite the thin margins.

Please elaborate on your motors business in Malaysia.

We are involved in the entire automotive value chain and this includes assembly (including component assembly), distribution and dealership (sales of new and used cars, after-sales service), as well as rental.

We are the distributor for Hyundai, Ford and Porsche. We also have a 49% stake in the BMW distributor of Malaysia, and a 60:40 joint venture with Sisma Auto for the distributorship of Jaguar Land Rover.

At our assembly facility in Kulim, Kedah, we assemble vehicles for brands such as BMW, Hyundai, Mazda and MINI, among others, for both the domestic and export markets.

In April 2018, we started the BMW engine assembly plant which was quite a coup for us, as it is only the third in Asia, and the only engine plant out of Germany that is wholly owned by a foreign company.

Will you be adding more brands to your assembly plant?

We are currently in talks with some car players to assemble new marques at our manufacturing plant in Kulim. We have 200 acres of land in Kulim, and currently, only 56% of the land is occupied, giving us room for further expansion.

Please elaborate on your recent acquisition of the Gough Group in New Zealand and the three dealerships in Australia.

The recent acquisitions of Gough Group Ltd and the three car dealerships in Sydney are part of our expansion efforts to strengthen our leadership position in the region.

The Gough Group acquisition is the biggest since the demerger and

over the long term is expected to contribute about Rm1bil to our revenue.

We expect the car dealerships to contribute about Au$260mil or over Rm700mil in revenue from FY20. They are also strategically positioned in a prime location in Sydney, which will give us the option of unlocking the value of the land over the long term.

Will there be volume growth in New Zealand?

It will not be as high as Australia, but is a bigger market than Malaysia and will be value-accretive. Since New Zealand has a growing forestry industry, there is potential to tap into it.

Do you think your margins are thinner now?

There is always going to be some pressure on margins. We are working to improve our operational efficiency.

To this end, we have invested a great deal in digitalisation. We started five years ago in the industrial business, looking at all our processes in Caterpillar dealerships across our markets.

We developed our own proprietary system based on the cloud-based software technology and data-sharing platforms. Today, we have various apps running that improve workflow for our employees.

At the Sime Darby industrial level, digital initiatives have contributed 8% to the division’s revenue.

You mentioned synergistic mergers and acquisitions (M&AS). What are the other deals you are looking at currently?

We recently bid for Columbia Asia, but ultimately, it all boils down to valuation.

One of our aims is to build up our healthcare business and we will continue to seek out viable opportunities.

In terms of Caterpillar, getting another dealership might be difficult, as this opportunity doesn’t come very often. However, we are looking to expand in the adjacency segment such as rental and asset management.

We are currently looking at some Chinese companies for our motors division.

Will there be a cash call in the near term?

This will depend on the M&A. However, the group is cash-flow positive and we do not expect a cash call in the near term. Our gearing is also fairly low at 0.3 times currently, and hence, we would be able to gear up if needed.

Datuk Abdul Rahman Ahmad, the former Permodalan Nasional Bhd CEO, is coming to Sime Darby as the new chairman. Are you looking forward to this?

Yes, we are. He brings with him an abundance of experience from his many years in corporate Malaysia. We are confident that his participation at the board level will be meaningful.