Sime Darby’s acquisition of UMW triggers upgrade

PETALING JAYA: CGS International Research (CGSI Research) has raised its rating for Sime Darby Bhd from a “hold” to “add” as it sees the group’s acquisition of UMW Holdings Bhd being earnings-accretive and a good de-risking strategy.

The research firm has a RM3.06 target price on the stock up from RM2.18 before based on 12.8 times the company’s 2025 price earnings ratio.

“We view the RM5.8bil acquisition of UMW as positive for Sime Darby, as it allows the group to solidify its leading position in the Malaysian automotive market, while reducing its reliance on the Chinese market, which we expect to be challenging in the financial year 2024 to 2025,” said CGSI Research in a report.

According to the research firm, the Malaysian Automotive Association expects 2024 total industry volumes to reach 740,000, a historical high excluding 2023.

The research firm said post-acquisition, Sime Darby will account for around 59% of new car sales in Malaysia.

It expects the group to maintain its market share lead with strong brand recognition for its luxury and premium offerings such as BMW and Porsche and newly acquired mass-market brands such as Perodua and Toyota.

Additionally, the group’s electric vehicle (EV) offerings are also competitively priced, and it has a reputation as a reliable after-sales service provider, said CGSI Research.

On the other hand, the group’s Chinese motor business will continue experiencing margin pressure in 2024 due to the withdrawal of EV tax incentives and heavy discounting by local automakers.

However, some recovery is expected from 2025 onwards.

CGSI Research said declining export demand for Australian mining commodities would impact Sime Darby’s industrial earnings forecast in FY24-FY25.

The research firm said Sime Darby’s industrial segment primarily serves the Australian mining and construction sectors, contributing 75% of its industrial revenue.

It added that while there are potential headwinds from a normalisation in the industrial segment, greater upside would come if China’s automotive inventory levels fall significantly, and if more synergies from UMW are realised.

“We expect such improvements to materialise in 2025 and 2026 but UMW’s incremental earnings will help support the group’s profitability in the meantime.”

The research firm said re-rating catalysts include higher metal prices leading to more demand for heavy machinery.

Downside risks, meanwhile, are lower metal prices leading to less demand for heavy machinery, and slower-than-expected end to heavy discounting in China’s auto market.