TA Research has maintained its earnings forecast for Sime Darby for financial year 2023, but cut its forecast by 5% for FY24 as it expects sales in China to be weaker.
PETALING JAYA: Sime Darby Bhd
is expected to be negatively impacted by pricing pressures in China for its motor division and lower demand for industrial equipment as well as higher finance cost, leading analysts to cut their earnings expectations for the conglomerate.
TA Research has maintained its earnings forecast for Sime Darby for financial year 2023 (FY23), but cut its forecast by 5% for FY24 as it expects sales in China to be weaker.
“We expect automotive sales in China to continue to be impacted by sluggish consumer demand due to a weaker economic outlook and higher interest rates. A full-blown price war will continue to affect the group’s margins, in our view.
“Management expects market volume for industrial equipment in China to be subdued until government funding is allocated to the construction players,” the research firm stated in a report on the group yesterday.
The negative impact from China will be offset somewhat by its operations in Australia, where the mining sector is expected to benefit from increasing demand for coal, driven by the resumption of coal exports to China and urbanisation in Asia, which should support equipment and product support sales in Australia, TA Research noted.
Sime Darby’s third-quarter FY23 (ended March 31) results came in within expectations, with its core net profit dropping 7.4% year-on-year (y-o-y) to RM237mil despite a 9.5% rise in revenue to RM11.5bil.
The decline in profit was mainly due to the weaker performance of its automotive division, which is facing margin pressures and lower contribution from its China operations.
Its industrial equipment business is enjoying better profit from the Australasia business over the cumulative nine months.
CGS-CIMB Research said the margin erosion in the motor division was due to an ongoing intense car market price war in China (which accounted for 46% of the motor segment’s revenue), which is unlikely to ease in the near to medium term, given the current strong pricing competition there.
“However, Sime Darby shared that its car inventory in China remains at a healthy level,” CGS-CIMB Research said.
Nevertheless, it reiterated a “hold” call on the stock but with a lower sum-of-parts based target price (TP) of RM2.18 a share.
“We believe the share price will be supported by its decent forecast FY23-FY25 dividend yields of 4.8%-5.4%, given its sizeable cash coffers of RM2.2bil (32 sen per share) and ongoing asset monetisation of its 760 acres of land in Malaysia Vision Valley, which has a potential net gain of RM250mil in FY23,” the research house added.
TA Research has maintained a “buy” call on Sime Darby with a higher TP of RM2.45 a share (previously RM2.43), after the earnings adjustment and rolling the valuation base year to calendar year 2024.
