Sime Darby Bhd (Jan 23, RM2.90)

Downgrade to hold with a higher target price (TP) of RM3.05: We raise our TP on Sime Darby Bhd to RM3.05 as we adjust our financial year 2018 (FY18) to FY20 estimates and roll forward our valuation base year to FY19, we downgrade our recommendation to “hold” from “buy” based on valuation. Although we maintain our positive long-term view on Sime Darby in view of its attractive new model launches, the revival of the mining sector in Australia, rapid infrastructure development in key markets, strong growth potential in Ramsay Sime Darby Health Care (RSDH) and the unlocking of hidden gems in other assets within the group, we believe these known positives have been priced in, following the 28.4% share-price appreciation since the demerger.

Having endured the doldrums between 2014 and 2016, earnings from Sime Darby Industrial (SDI), the third-largest Caterpillar dealer globally, is set to rebound in FY18-FY19 on firmer commodity prices and mega infrastructure projects and townships in the pipeline. SDI’s order book has ballooned to RM2.4 billion, which is expected to keep it occupied until the first half of 2019.

Sime Darby’s motor division (No 2 BMW dealer globally) should see higher revenue growth in FY19-FY20, driven by BMW’s product upcycle and attractive model line-ups from other car marques.

Robust long-term healthcare demand should continue to benefit RSDH — one of the largest hospital operators in Malaysia (bed capacity accounts for 6.8% market share). We expect its ongoing cost rationalisation initiatives to foster earnings growth.

We raise our FY18-FY20 earnings per share estimates by 11%-56%, taking into consideration higher growth rate assumptions for all divisions under Sime Darby. At a 21 times FY19 price-earnings ratio estimate, valuation looks fair. Potential upward rerating catalysts include possible disposal of its logistics division or its Malaysian Vision Valley land. Key downside risks are competition in respective divisions, susceptibility to an economic slowdown, and local regulatory risks. — Affin Hwang Research, Jan 23

This article first appeared in The Edge Financial Daily, on Jan 24, 2018.

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