CGSI Research's valuations are based on several factors including Sime Darby’s leading position in the Malaysian automotive market.
PETALING JAYA: Earnings surprise and accelerated electric vehicle (EV) as well as hybrid adoption are seen as re-rating catalysts for Sime Darby Bhd
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CGS International (CGSI) Research said the stock is grossly undervalued, trading at 8.8 times financial year 2025 (FY25) price earnings ratio, suggesting a disconnect between Sime Darby’s intrinsic value and market sentiment.
Sime Darby’s management reiterated deep intrinsic value on the back of continuous demand for commodities, leading to higher contributions to its industrial segment, besides stabilising China auto business and strong Malaysia auto market share.
Investor concerns about its China exposure appear misguided, while the full contribution from UMW Holdings Bhd is being overlooked, it said.
It retained its “add” call on the stock with a target price of RM3.60 a share.
The downside risks cited include a price war in China’s automotive sector and lower metal prices. The research house’s valuations are based on several factors including Sime Darby’s leading position in the Malaysian automotive market.
Malaysia surpassed Thailand for the second consecutive year to be the second largest automotive market in Asean with Sime Darby having a 60% market share in 2024.
The market is overlooking the significant upside from the UMW acquisition (FY24 contribution was only six months) which enabled it to raise market share from below 10% to 60%.
Contrary to market perception, China’s earnings contribution is modest now.
Before the UMW acquisition in FY24, China contributed about 39% and 28% to Sime Darby’s revenue and profit before interest and tax (PBIT) respectively from FY19 to FY23.
With the inclusion and full contribution from the UMW division and deterioration in earnings from China in the past two years, it expects less than 5% PBIT contribution from China.
Malaysia will form about 60% of PBIT in FY25 to FY27.
The acquisition of UMW allowed Sime Darby to diversify its revenue and profits and lessen its dependence on overseas markets, which made up about 80% of core PBIT since FY18.
It expects a greater PBIT contribution from Malaysia moving forward with meaningful contribution from the UMW division.
In FY24, the revenue and PBIT for the UMW division was at RM9.4bil and RM480mil with only a six-month contribution.
With the acquisition of UMW, Malaysia contributed 45% of core PBIT in FY24 versus 24% in FY23.
It expected the Malaysia-based contribution to further increase to 60% in FY25.
Sime Darby is the largest beneficiary of the robust total industry volume (TIV) growth in Malaysia, capturing about 60% of the market share.
TIV is expected to decline by 3% year-on-year in 2025. Sime Darby would benefit by gaining market share, especially in domestic brands and the EV segment.
