This article first appeared in The Edge Financial Daily on March 7, 2018 - March 13, 2018
Sime Darby Bhd
(March 6, RM2.62)
Maintain sell with a higher target price (TP) of RM2.55: After our recent meeting with Sime Darby Bhd, we believe its forward prospects are largely secured, premised on a new life cycle model for BMW, uptick in coal mining activities in Australia, stronger ringgit, and no fixed price on valuable Malaysian Vision Valley land. That said, we believe Sime Darby is currently trading at lofty valuations, with limited upside. Thus, we maintain “sell” on Sime Darby with a higher TP of RM2.55 based on sum-of-parts valuations.
We understand that the continental luxury car segment is an oligopoly between Audi, Mercedes and BMW. According to management, each marque will take the spotlight with new life cycle models. Note that Mercedes currently holds the crown in terms of sales, registering a total of 2.3 million cars delivered globally in 2017. However, according to various sources, BMW intends to snatch the crown by 2020 as it launches its new model line-up. Sime Darby management informed us that the X3 and X5 sport utility vehicles will be launched in financial year 2018 (FY18), whilst the entry-level 3 Series will be launched in the second half of FY19 (2HFY19) (1H of 2019). To recap, the 3 Series is BMW’s bestselling model, accounting for around 30% of annual sales globally. Thus, we believe this will boost Sime Darby’s FY19 to FY20 sales, as it accounts for 2% of total BMW sales globally.
Besides the expected improvement in the automotive segment, we believe the industrial segment will also pose major growth. Although there is an increase in construction activities in Malaysia and China (where Sime Darby distributes Caterpillar equipment), competition in these markets is intense given the cheaper Asean brands such as Komatsu. In contrast, Sime Darby’s Caterpillar distributorships in Australia (which supplies mining equipment in Queensland and the Northern Territory) are largely insulated from competitive intensity. Management also noted that competition is less intense in the mining equipment space, as Caterpillar is the preferred brand for most miners. Furthermore, we note that the recent increase in coal prices has spurred demand for coal mining equipment. This is in line with historical trend and will boost Sime Darby’s industrial order book. According to management, Sime Darby’s Australian industrial order book jumped by 350% to RM1.24 billion in December 2017 from RM275 million the year before
On top of the run-up in coal prices, we understand that construction of the Carmichael coal mine began in October 2017. This mine is set to be the largest coal mine in Australia, with expected production of 2.3 billion tonnes over 60 years at an investment cost of US$16.5 billion. As a result, if the project proceeds as planned, Sime Darby’s order book should surge, given that it is the sole distributor of Caterpillar in Queensland, where the mine is located. That said, we note that Adani (Carmichael’s operator) has been facing massive opposition from environmental activists due to its expected impact on the Great Barrier Reef and is facing difficulties in financing the project. Thus, we believe that the likelihood of delays is high as Adani attempts to manoeuvre around environmental and funding concerns. — TA Securities Research, March 6