CGSI Research said Sime Darby’s automotive business stands to benefit from the stronger ringgit especially via UMW and its own operations across Malaysia.
PETALING JAYA: Sime Darby Bhd
’s earnings in the financial years ahead will be helped by gains from the stronger ringgit and contributions from UMW Holdings, which is now a wholly-owned subsidiary of the group.
CGS International (CGSI) Research stated Sime Darby’s automotive business stands to benefit from the stronger local unit especially via UMW and its own operations across Malaysia.
“The strengthening ringgit is set to bolster Sime Darby’s margins across its Malaysia motor and UMW divisions.
“About 60% of component costs in the Malaysia motor division, 50% of component costs for UMW Toyota and 10% of UMW’s associate – Perusahaan Otomobil Kedua Sdn Bhd (Perodua) – are sourced from abroad, savings from which flow directly to earnings before interest and tax,” the research house noted.
CGSI Research expects the gains on the currency to help offset lower profits from its Australia and Asean operations due to translation of profits at a lower exchange rate, while its loss-making China motor division will show lower currency translation losses.
In Sime Darby’s financial year 2024 (FY24) ended June 30, revenue and profit before interest and tax (PBIT) for the UMW division was at RM9.4bil and RM480mil, respectively, with only a six-month contribution.
Upon completion of the UMW acquisition, Sime Darby’s Malaysia assets contributed 45% of core PBIT in FY24 versus 24% in FY23.
Due to the potential currency gains, the research house has raised its forecast estimates for Sime Darby by 3% to 16% and now projects the group’s core net profit to grow by 20% in FY25 and 19% in FY26.
“Our model shows that despite ongoing challenges in its China automotive operations and weaker earnings from the industrial segment, Sime Darby should generate mid-to-high teens core profit growth in the next two years.
“This will be driven by the full 12-month contribution from UMW, resilient sales for most of its units and net benefit to the group from the ringgit appreciation,” it stated.
CGSI Research added that Sime Darby is the largest beneficiary of the robust auto sales in Malaysia, given it is the largest automotive player in the country with a 60% market share.
In the eight months of 2024, Malaysian vehicle sales grew by 5.8% year-on-year with Perodua recording a 16% year-on-year increase in car sales.
The research house added the growing popularity of the BYD make, which is distributed by Sime Motor, as well as Toyota’s strong branding, positions Sime Darby favourably within Malaysia’s automotive market.
CGSI Research maintained its “add” call on Sime Darby but at a higher target price of RM3.60 a share (from RM3.28).
“The stock, which has heavily lagged the market year-to-date, trades at an undemanding 9.5 times FY25 price earnings multiple and offers a decent yield of 5%.
“We believe the full benefit and earnings contribution from UMW have yet to be reflected while concerns surrounding its China’s automotive operations are exaggerated,” the research outfit summarised.
