Sime Darby Property Bhd - Sailing Smoothly

Date: 31/05/2019

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 results conference call yesterday feeling neutral and assured on its future earnings trajectory as the Group is working hard to maintain its sales target of RM2.30b, vs. our slightly more conservative target of RM2.14b. Inventories are also declining steadily for completed projects (-7%), while additional non-core disposals would be a positive to earnings. Maintain FY19- 20E CNP of RM395-462m for now. Downgrade to MP (from OP) on an unchanged TP of RM1.10.

Strong 1Q19 was expected due to a chunky asset disposal. To recap, SIMEPROP’s 1Q19 CNP of RM264.5m was deemed broadly within our expectation (67%) largely due to a hefty gain on non-core asset disposal (RM204m) which was recognized in 1Q19, as expected. Going forward, for FY19E CNP, we built in a total of RM280m pretax gains on disposals from non-core assets with upcoming disposals (e.g. 300 ac of Kedah land by 1H19). The Group also highlighted plans to dispose land at U-Thanth, Kuala Lumpur and Chemara West, Negeri Sembilan, both with a combined size of 20 ac, but no details on sale values or land sizes were given. Besides, time frames to complete these potential transactions are also uncertain. As such, we have not included these anticipations in our estimates. Recall that, management has guided RM2b in disposal gains over the next 4-6 years (post completing Darby Park disposal for RM204m, leaving RM1.8b remaining).

Management maintains its sales target of RM2.30b in FY19. 1Q19 sales of RM403m was driven by township projects in the Greater Klang Valley (55%), Guthrie Corridor (25%) and Klang (15%) mainly from projects such as "Elsa" (Bandar Bukit Raja), "Elmina Valley Five" (Elmina West) and "The Ridge" (KL East). Management maintains its FY19 sales target of RM2.30b while we remain slightly more conservative at RM2.14b. SIMEPROP remains persistent in its marketing efforts to capture domestic sales through campaigns such as Primetime 8 Campaign (Mar-April 2019), and will be rolling out its Raya 2019 campaign from (May-June 2019) which offers a host of promotions and rebates. Additionally, SIMEPROP is further engaging its customers through its co-creation and crowd sourcing platform called ‘dto’ that allows potential customers to vote for their preferred development concept, design and amenities. As most of the campaigns are ongoing in 1H19, we believe sales will pick up in 2H19 and should be able to meet our and management’s target.

Inventory clearing progressing steadily. Completed inventories declined by 7% to RM813m on higher sales from projects such as Serini (Taman Melawati), Bandar Ainsdale and East Residence (KLGCC Resort). Completed projects represent 22% of total inventory units but 40% of total value, and are mostly landed development projects in the Klang Valley. The bulk of inventory value is in Taman Melawati projects of which the group is actively working on improving take-up rates. Maintain FY19-20E CNP of RM395-462m. FY19-20E dividend provides 2.2-2.6% yield.

Downgrade to MARKET PERFORM (from OP) on an unchanged TP of RM1.10. Our TP is based on an implied 66% discount to its FD SoP of RM3.24. Our discount is in line with peer SPSETIA, with its valuation pegged closer to the -2.0SD level, given expected thin ROE of 4-5% in FY19-20. We are comfortable with our call as its share price has increased by 9.3% since our OP call in our report dated 24th May 2019, “Delays at Battersea?”, while we believe we have accounted for most foreseeable earnings risk as well as upsides. Additionally, note that our FY21E earnings which accounts for potentially more conservative takeup rates at Battersea Phase 2 and 3a, implies a target PER of 15x on FY21E EPS, close to its peer - SPSETIA’s - implied FY21E PER of 14x (-1.0SD level to our Fwd. 7-year average PER).

Source: Kenanga Research - 31 May 2019

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