SIME: Core Earnings Exhibit Resilience Amidst Sectoral Challenges, Meeting Estimates

A leading diversified conglomerate reported a significant drop in its first-quarter headline net profit, largely attributed to the absence of a one-off land disposal gain from the previous year. Stripping out this extraordinary item, the company’s core net profit experienced a more modest decline of 5.4% year-on-year, reaching RM335.0 million. This performance was in line with both analyst and consensus estimates, accounting for approximately 24.4% and 27.4% of full-year forecasts, respectively, indicating operational resilience despite a challenging environment.

Performance Review

Revenue for the quarter saw a marginal dip of 1.3% year-on-year, totaling RM18.0 billion. The Industrial division was a key contributor to this decline, experiencing a 13.9% drop in revenue. This was primarily due to a shift in equipment delivery timings to the subsequent quarter, compounded by delivery delays and adverse foreign exchange headwinds. While the Motor division registered a 5.7% increase in revenue, driven by robust electric vehicle sales in Singapore, it faced intense competition and weaker assembly production.

Despite the overall pressure, the UMW division emerged as a standout performer, delivering a robust 22.0% growth in Profit Before Interest and Tax (PBIT). This strong showing was largely attributed to resilient sales, ongoing margin improvement initiatives, strategic cost optimisation efforts, and a favorable currency tailwind, effectively mitigating some of the losses from other segments.

Future Outlook

The outlook for the group remains uncertain, with challenging business conditions expected to persist across its key operating markets, particularly in China. Intense competition in the Chinese market, which has impacted profitability, could potentially be mitigated by a proposed pricing law reform, if enacted. In the Malaysian auto sector, normalization is anticipated post-2024 peak, with the mass-market segment projected to remain resilient, while the premium segment may slow down due to economic softness and rising costs. The industry also faces a critical cross-market challenge from the expansion of cost-competitive Chinese OEMs, which is expected to erode profitability and constrain earnings growth industry-wide.

Given the stable performance within expectations despite various headwinds, the investment bank maintains its earnings forecasts and reiterates a Neutral rating with an SOTP-based target price of RM2.05, acknowledging both the operational strengths and ongoing market challenges.