KUALA LUMPUR: CGS-CIMB Research is neutral on Sime Darby Bhd's (SDB) RM1.5 billion cash deal to acquire Cavpower Group, which is a distributor of Caterpillar Inc equipment in South Australia and Broken Hill in New South Wales.
The research firm said this is given the steep acquisition valuation for Cavpower.
"Based on our sensitivity analysis, the impact on SDB's net profit could be muted in the near term.
"Nonetheless, SDB appears confident about the potential strong earnings growth of Cavpower from the latter's financial year 2023 (FY23) forecast onwards, citing rising commodity tailwinds from elevated commodity prices due to strong demand, leading to higher demand for Cavpower's products and services in South Australia," it said in a note today.
CGS-CIMB Research added that this is SDB's third acquisition in Australia since 2021, further bolstering the company's industrial division presence in Australasia.
This presence accounts for 60 per cent of the company's total core profit before interest and taxes (PBIT) in the nine months of the financial year 2023 (9MFY23).
Cavpower is a Caterpillar dealership in South Australia and Broken Hill with a portfolio of mining clients focusing on the copper, lithium, and cobalt sectors and a market size of approximately 10 per cent of SDB's industrial segment revenue in Australia.
Thus, CGS-CIMB Research believes this acquisition could help SDB expand its presence in Australia and diversify its commodity exposure from coal.
"SDB expects the deal to be completed in the fourth quarter of 2023 (Q423).
"Assuming the acquisition is funded with 90 per cent debt, SDB's net gearing will increase from 0.23 times at the end of March 2023 to approximately 0.33 times, which is still healthy and should not affect its ability to pay dividends, in our view," it noted.
Overall, CGS-CIMB Research has kept its 'Hold' call on SDB with a target price of RM2.18 as it believes margins at the company's China motor division will remain compressed amid the ongoing auto price war, albeit partially mitigated by the expected earnings recovery at its industrial divisions.
The research firm also believes that SDB's share price will be supported by its decent dividend yield of five per cent.
Moving forward, key upside risks for SDB include steeper margin contraction at its China motor division and the disposal of its healthcare unit at attractive valuations.
Downside risks include a sharp decline in commodity prices, which reduces industrial demand, and a prolonged China auto price war, which hurts margins.