Investment Highlights

• We initiate coverage on Sime Darby Property (SimeProp) with a HOLD recommendation, pegging a fair value of RM1.08 based on a conservative 45% discount to RNAV (Exhibit 4). We expect the company to register core net earnings of RM169.0mil, RM401.9mil and RM497.0mil for FPE18, FY19 and FY20 respectively.

• SimeProp has a 45-year track record in developing residential, commercial, and industrial properties. The group is Malaysia’s biggest property developer in terms of landbank, with a balance area of 20,572 acres and a total estimated GDV of RM89.3bil.

• SimeProp has built 23 townships and developments that are strategically located and connected to major highways and transportation hubs within key growth areas and economic corridors stretching from the central region of Klang Valley to Negeri Sembilan and Johor in the south.

• The commercial assets in the second phase of Battersea Power Station project in which SimeProp owns a 40% JV stake has been sold to PNB and EPF for £1.583bil (RM8.35bil). The transaction is expected to be completed in the first quarter of 2019. Meanwhile Phase 2 residential, comprising 255 units of apartments, has a GDV of RM3.9– 4.0bil and is expected to be completed by the end of 2020. Revenue profit recognition is expected from 4QFY20 onwards. So far 90% of Phase 2 properties have been sold.

• As of 1QFP18 (3QCY18), SimeProp has launched projects with total GDV of RM310.5mil, namely Ayra, Bandar Bukit Raja (take-up rate 82%), C3, Serenia City (take-up rate 32%) and Anggerik, Nilai Impian (take-up rate 44%), all located in the central region of Peninsular Malaysia. Meanwhile, the company’s unbilled sales of RM2.3bil will be progressively recognized over 6MFP18-FY19.

• In the short-to-medium term, the property market remains subdued with many potential buyers having difficulty in obtaining loans due to their already high debt service ratios. Meanwhile, a lack of overseas contributions and slow progress billings from local projects are the key factors for weaker earnings in 6MFP18F. Nonetheless, SimeProp is gearing up its strategic campaign to promote new and completed developments by offering discounts and rebates with the target to reduce the existing inventory level by 6%– 10% by the end of 2018.
• Moving forward, 80% of residential launches will be in the middle range (<RM1.0mil) in Greater Klang Valley to take advantage of Budget 2019 measures. SimeProp is also looking to dispose of its non-strategic landbank to improveits cash flow.

Source: AmInvest Research - 4 Jan 2019