Sime Darby Property - Kitchen Sinking Quarter

Date: 01/03/2019

Source  :  KENANGA
Stock  :  SIMEPROP       Price Target  :  1.10      |      Price Call  :  HOLD
        Last Price  :  0.615      |      Upside/Downside  :  +0.485 (78.86%)

We came away from SIMEPROP’s briefing with more clarity post the disappointing 6MFPE18 results. Going forward, the group is focusing on tactically managing sales through demand driven launches as well as managing inventory levels. We maintain our sales target of RM2.27b each in FY19-20 which is close to management’s target of RM2.3b in FY19, but lower FY19-20E CNPs by 2- 19% post house-keeping. Maintain MARKET PERFORM and TP of RM1.10.

Kitchen sinking. To recap, SIMEPROPs 6MFPE18 results recorded a CNL of RM126.1m missing our expectations of CNP of RM183m. Although top-line met (97%) due to a land sale to Mitsui JV (RM154m), EBIT margin compression to 1.7% (vs. our expectations of 17%) was due to higher operating cost caused by; (i) impairment of aged inventories (c.RM110m) such as East Residence, Rimbun Sanctuary, Bukit Jelutong, and Alya, (ii) write-off of capitalized development expenditure (RM99.8m), and (iii) write-off of RM26m for long-term receivables on West Coast Expressway land acquisition. If we exclude these items, EBIT would have been in the black at RM205m (EBIT margin: 16%). If it were not for the hefty tax provision of RM178m (refer overleaf for explanation), which we did not strip out from our CNL earlier, 6MFPE18 CNP would have been in the black at RM7.3m.

Strong sales driven by landed Klang Valley residential. 6MFPE18 sales of RM1.34b exceeded target by 34% as recent launches, which were mostly landed residentials in the Klang Valley, received high take-ups, while RM88.9m was attributed to land sales in Bukit Selarung, Kedah. The projects were; Bandar Bukit Raja township (31% of sales), (ii) townships along the Guthrie Corridor (30% of sales) and (iii) Greater Klang Valley (27% of sales). FY19 will see c.RM1.5-2.5b launches of mostly landed residential located in the Greater Klang Valley and GCE, and priced below RM750k/unit. As such, we maintain our sales target of RM2.27b each in FY19-20 which is close to management’s target of RM2.3b in FY19. The Group’s latest unbilled sales of RM2.0b provide c.1 year visibility while it is targeting unbilled sales of RM2.3b in FY19E. Additionally, inventories were lower by 5% QoQ to RM2.1b (refer overleaf).

Expect more non-core asset disposals in FY19. To date, the group has entered into a SPA to dispose some assets for a combined value of RM371m (refer overleaf). Recall that management is targeting more disposals, which are expected to generate more than RM2b worth of gains over the next 4-6 years.

Earnings adjustments. We raise our FY19E non-core asset PBT by 40% to RM280m while keeping FY20E assumptions unchanged at RM300m. However, we lower our CNP margins to 15-15% in FY19-20 (from 18-21%) following margin weakness in the recent results. All in, we lower FY19-20E CNPs by 2-19% to RM395-471m.

Maintain MARKET PERFORM with an unchanged TP of RM1.10. Our current recommendation is based on an implied 66% discount to its FD SoP of RM3.24. Our discount is in line with peer SPSETIA with its valuations pegged closer to the -2.0SD levels. We are comfortable with our call as its sales momentum remained healthy which we have priced in our forecasts. However, without fresh catalysts and earnings improvement, coupled with expected thin ROE of 4% (in FY19), we believe its valuation will range bound at current levels.

Source: Kenanga Research - 01 Mar 2019

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