SIME: Earnings Forecasts Raised Amid Strong Segment Outlook, Target Price Increased
| Investment Bank | TA SECURITIES |
|---|---|
| TP (Target Price) | RM0.25 (+25.0%) |
| Last Traded | RM0.20 |
| Recommendation |
An investment bank has reiterated a “BUY” recommendation for a key industrial player, raising its target price to RM0.25, citing solid earnings visibility driven by an improving outlook in its industrial segment and resilient demand in the automotive sector. This positive revision comes despite some prevailing challenges, underpinning a 25.0% potential upside from its last traded price of RM0.20.
Performance Review and Drivers
The company is expected to deliver strong first-half FY26 results, with projected recurring net profit ranging from MYR350 million to MYR385 million, marking an anticipated increase of 4% to 15% quarter-on-quarter and 13% to 24% year-on-year. This robust performance is attributed to higher sales volumes from its automotive joint ventures, Perodua and Toyota, coupled with improved margins from the industrial segment. The industrial sector is set to benefit from an upward adjustment in average selling prices (ASPs) that took full effect in July 2025. Additionally, the motor segment is expected to see improvements driven by forward-buying activities ahead of the expiry of CBU electric vehicle tax rebates.
In the automotive sector, Perodua achieved an all-time high in 4Q25 sales with 104,810 units, leading to a 1% year-on-year increase in 2025 sales volume to 359,904 units, surpassing initial forecasts. Toyota and BYD also posted strong sales, exceeding earlier estimates. However, the Chinese motor segment continues to be a challenging area for the group. The industrial segment experienced some margin compression in the previous quarter due to delays in new equipment deliveries and lower after-sales contributions.
Future Outlook and Earnings Revisions
The outlook for the industrial segment remains sanguine. Higher ASPs for Caterpillar products, fully implemented in July 2025, and sustained demand from improving mining activities are expected to drive improvement in the second quarter of FY26. The segment is also poised to capitalize on the robust growth of data centers in Malaysia, where the company holds a significant market share. The 2026 outlook for Malaysian data centers is positive, with 2.2 gigawatts of projects under construction.
Despite a projected 2% year-on-year decline in overall total industry volume (TIV) for CY26, Perodua’s volume is anticipated to remain resilient, buoyed by a supportive macroeconomic environment, attractive pricing, and the introduction of new models like the B-segment Perodua Traz. The investment bank has consequently raised its volume assumptions in line with the revised 2026 TIV forecast.
Overall earnings forecasts for FY26F-28F have been lifted by 5-7%, incorporating the updated Perodua sales assumptions, higher volumes in the motor segment, and increased revenue growth for the industrial segment. The ESG discount was also adjusted from -2% to 0% due to reduced greenhouse gas emissions, further contributing to the revised target price. The company’s valuation remains compelling, trading largely within its three-year average P/E range, supported by healthy projected recurring net profit growth.
Key Risks
Key risks to this positive outlook include the potential for weaker-than-expected margins across its operations and softer-than-expected car sales in its various markets. Additionally, while a structurally weaker US Dollar is generally beneficial for the company’s foreign currency-denominated purchases, a significant appreciation of the Malaysian Ringgit could reduce pre-tax profit, although this might be offset by operational efficiencies.
