Monday 31 October 2011

Sime Darby still booming, Bucyrus looms

Sime Darby Bhd (Oct 28, RM8.90)

Maintain hold call with unchanged target price of RM8.36: We recently visited one of Hastings Deering’s (a 100%-subsidiary of Sime Darby) branch office in Queensland, in a mining town called Mackay.

After the visit, we are upbeat over Hastings’ prospects with earnings projected to sustain double digit growth in the near term.

Its ongoing negotiations with Caterpillar Inc (CAT) on Bucyrus International Inc’s distribution assets in Australia may prove timely with several new and bigger coal mines scheduled to open in the near future.

We make no change to our earnings forecasts (pre-Bucyrus distributorship).

We also retain our “hold” call with an unchanged target priceof RM8.36 based on 16 times FY13 price earnings ratio.

The acquisition of Bucyrus by CAT in July is highly complementary as there is minimal overlap in the existing product offerings.

With Bucyrus, CAT’s addressable market (under Hastings) for the mining sector in Australia will grow to 75% from 23%.

Hastings therefore stands to benefit with a wider range of surface mining and underground mining equipment to offer to its clients; galvanising its competitive advantage as a one-stop centre.

Asked to comment on the key challenges Hastings faces, management mentioned the impact of a potential slowdown in global economic growth. New equipment sales were affected by the 2008/09 global financial crisis.

The other challenge that could derail the company’s growth plan is the shortage of skilled labour to provide timely and quality service to clients. To address that, Hastings recently opened an A$8 million (RM26 million) new training centre in Brisbane that can accommodate about 150 new trainees a year (with the existing 450 students).

While Hastings remains tight-lipped over the initial investment cost for the Bucryus distributorship, our back of-the-envelope estimates suggest at least RM537 million.

This estimate may prove conservative if the eventual amount of inventories to be held turns out to be significantly higher, given Bucyrus’ relatively more expensive equipment which can cost as much as US$200 million (RM612 million) for a single piece of machinery; equivalent to an A380 Airbus.

While earnings contribution from Bucyrus may be relatively small to Sime in the near term, the long-term prospects of this new dealership is great especially if it extends to China’s Xinjiang province which has 29 times Australia’s coal reserves. Details of the Bucryus dealership are expected in FY12. — Maybank IB Research, Oct 28


This article appeared in The Edge Financial Daily, October 31, 2011.
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