SIME: Strong Performance Exceeds Street Estimates Amid Cost Efficiencies

A recent investment bank research report indicates that the company delivered robust financial results for the first half of fiscal year 2026 (1HFY26), with core earnings significantly outperforming Street estimates. Despite largely meeting internal expectations, the strong performance was primarily driven by effective cost management and a resilient motor segment.

Performance Review

The company’s 1HFY26 core earnings reached MYR766 million, marking a 15% year-on-year increase. This figure not only aligned with the bank’s own projections but also surpassed Street forecasts by 56% to 58% of full-year estimates. A key contributor to this outperformance was a substantial 30% year-on-year reduction in interest expenses, attributed to proactive debt reduction efforts.

The motor segment demonstrated exceptional strength, with its 2QFY26 core profit before interest and tax (PBIT) surging 65% quarter-on-quarter and 77% year-on-year to MYR209 million. This robust growth was largely propelled by strong assembly operations in Malaysia and a 90% quarter-on-quarter improvement in China market sales, bolstered by rebates and reduced overheads. Consequently, the motor segment’s PBIT margin expanded to 2.1% in 2QFY26 from 1.4% in the previous quarter.

Challenges and Industrial Performance

While the industrial segment saw its revenue improve by 6% quarter-on-quarter and 1% year-on-year in 2QFY26, bringing 1HFY26 revenue to MYR9.2 billion, its core PBIT in Australia experienced a 4% quarter-on-quarter decline. This was largely due to lower after-sales contributions from miners deferring spending, which typically carry higher margins. This led to a marginal easing of the industrial PBIT margin to 6.4%. A relatively flattish outlook for this segment is anticipated, with stronger after-sales contributions only expected in FY27F.

Future Outlook and Investment Rating

Looking ahead, the outlook for the China motor business is expected to gradually improve, supported by government guidelines banning sales below production cost and the continuation of rebates into 2HFY26. The company is optimistic about its China business breaking even in FY26F, with a more substantial recovery projected for FY27. Similarly, after-sales contributions for the industrial segment are expected to strengthen in FY27F.

Overall, the bank has maintained its FY26F earnings projections but has upgraded its FY27F-FY28F earnings by 5% each. This revision stems from anticipated lower expenses due to a decreased gearing ratio and narrower losses within the China business. Based on these adjustments and rolling forward the valuation base year to FY27F, the investment bank has revised its target price to MYR2.55 (from MYR2.40), maintaining a BUY recommendation. This new target price suggests a 7% upside potential from the last traded price of MYR2.39. Key risks include weaker-than-expected margins, softer car sales across markets, and a prolonged downturn in China.