KUCHING: Sime Darby Bhd’s earnings per share (EPS) is expected to grow 15 per cent for financial year 2019 estimate (FY19E), despite analysts turning cautious on the group’s industrial segment’s earnings growth.
In the latest company update, Affin Hwang Investment Bank Bhd (Affin Hwang Capital) downgraded Sime Darby to ‘hold’, from ‘buy’ previously, with a lower target price of RM2.40 per share as the research firm turned cautious on the group’s industrial segment’s earnings growth, which is expected to face headwinds in the year ahead due to fragile coal prices.
However, Affin Hwang Capital believes that Sime Darby is still on track to deliver a set of good second half of FY19 results (2HFY19).
“We project 15 per cent EPS growth for FY19E, after revising up our EPS by six per cent,” the research firm said.
“We raise our industrial segment profit before interest and tax (PBIT) by 49 per cent to RM798 million as our previous forecast was conservative.
“We think Sime Darby is still on track to deliver a set of good 2HFY19 results on the back of continued demand for mining equipment in Australia and modest sales from other core segments.”
That said, Affin Hwang Capital anticipated earnings to decline moving into FY20-21E.
As such, the research firm cut its earnings forecasts by six per cent-12 per cent to incorporate lower industrial contribution on negative revenue growth of five per cent-15 per cent (from an increase of two per cent) as well as lower margin assumptions for motors ranging three to 3.2 per cent (from 3.5 to 3.6 per cent).
Valuation-wise, Affin Hwang Capital lowered Sime Darby’s 12-month target price to RM2.40 per share, from 2.70 per share previously, based on the research firm’s lower earnings forecasts, while re-benchmarking its sum of the parts (SOTP) valuation multiples to the respective peers.
Affin Hwang Capital’s SOTP target price is based on enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) multiple of seven-fold for the industrial division, seven-fold for the motor distribution division, eight-fold for the logistics division and 17-fold for the healthcare division, based on the sector average multiple.
“At 17.4-fold FY20E price earnings ratio (PER), valuations look fair at this juncture.”