KUALA LUMPUR (Feb 5): Sime Darby Bhd (KL:SIME) aims to achieve an 11% return on equity (ROE) within the next five years by focusing on strategic portfolio adjustments, cost optimisation, and expanding its presence in high-margin sectors, according to CIMB Securities.

The research house, which cited key takeaways from Sime Darby's recent investors day, said the group is set for a stronger financial performance, driven by the expansion of its industrial division, and the ongoing recovery of its China motors segment. 

The industrial division remains a key earnings driver for the company, with rental and after-sales services contributing 63% of division revenue in the financial year ended June 30, 2024 (FY2024), up from 49% in FY2020. 

The group’s expansion into copper, following its Cavpower acquisition, further diversifies its mining exposure beyond coal.

“Overall, we expect the industrial division to benefit from the global energy transition, and sustained demand for rental and after-sales services, supporting long-term growth,” said CIMB. 

Meanwhile, Sime Darby’s China motors division recovery is gaining traction, with financial assistance from its principal partner and restructuring efforts. 

The division incurred a RM184 million loss before interest and tax in FY2024, from RM94 million in FY2023, due to underperforming greenfield dealerships, said CIMB. 

Despite this, early signs of a turnaround emerged in the first quarter ended Sept 30, 2024 (1QFY2025), with a RM6 million core profit before interest and tax.

While investor sentiment remains cautious, analysts see potential upside from UMW integration synergies and land monetisation.

CIMB maintained its 'buy' call on Sime Darby, with a target price of RM3.

The house noted that Sime Darby had declined by 16% over the past six months, reaching near its 52-week low in mid-January 2025, largely due to softer investor sentiment towards China's economy, and a weaker demand outlook for Malaysia's automotive market. 

Despite this, there is potential upside to Sime Darby's earnings in FY2025 and FY2026, driven by a quicker recovery in the China motors division, and better-than-expected cost savings from integrating UMW Holdings. 

The stock is attractively valued at 10.2 times calendar year 2025 (CY2025) price-earnings, well below its historical seven-year mean of 14 times, and offers compelling dividend yields of 6.9% to 7.3% for CY2025 and CY2026. 

At the time of writing on Wednesday, Sime Darby shares were trading at RM2.21, valuing the company at RM15.1 billion.

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