Sime Darby to leverage on industrial sector in FY23

“The ongoing global inflationary pressures and economic slowdown pose risks to the demand for new cars.” Hong Leong Investment Bank Research

PETALING JAYA: Sime Darby Bhd is expected to leverage on its industrial segment in the financial year ending June 30, 2023 (FY23), underpinned by its high Rm4.2bil order book, according to Hong Leong Investment Bank (HLIB) Research.

The research firm said about 71.6% of the order book is in Australia, mainly in the mining sector, due to the continued highly profitable coal prices, while margins are expected to sustain as Sime Darby management has seen pick-up in the demand for maintenance and overhaul services.

“Demand for construction equipment remains weak in the near term due to inflationary pressures and potential delays in projects as well as ongoing lockdowns in China. Nevertheless, recent China government policies in reviewing measures to revive the property sector provide some upside to the demand recovery of construction machinery,” said HLIB Research in its latest report.

As for the group’s motors segment, the research unit pointed out that China’s ongoing zero-covid policy continues to affect global supply chain as well as the China market.

“The group’s operation in China suffered from deteriorated margin on higher discounting activities. The ongoing global inflationary pressures and economic slowdown pose risks to the demand for new cars,” added the research firm.

Meanwhile, the group has been positioning itself towards the electric vehicle (EV) market as the demand accelerates.

Other than existing brand portfolios such as BMW, Volvo, Porsche and Hyundai introducing more EV models, Sime Darby has also secured new distributorship for BYD in Singapore and Malaysia.

The group is also penetrating into EV charging infrastructure markets.

HLIB Research also expects Sime Darby’s stock to offer a continued decent dividend yield of 5.2% to 6.1% for FY23 to FY25, following cash flow proceeds from the disposal of Weifang Ports, Jining Ports and plots of Malaysian Vision Valley lands.

The research firm maintained its “buy” call on the stock, with a lower target price of RM2.70.

RHB Research in a note to clients said it expects Sime Darby to recover in the coming quarters with new vehicle model launches in the pipeline across all markets.

“The local motor wing also continues to see customers placing orders across its brands. Sime Darby’s Australasia industrial segment remains robust while the Chinese industrial wing may benefit from Beijing’s efforts to boost the property sector, although we are of the view that recovery will be slow,” said RHB Research.

The research unit noted with Sime Darby’s exciting line-up of new BMW models for Malaysia and China, its auto margins is expected to recover in subsequent quarters.

“While industrial margins remained relatively more robust, the group’s China business remains weak amidst continued challenges in the property sector,” said the research house.