Investment Highlights

• We maintained our HOLD recommendation on Sime Darby Property (SimeProp) with a lower fair value of RM1.06 based on a 45% discount to RNAV (Exhibit 3). We cut our FY19–FY20 net profit forecasts by 18.1% and 32.7% respectively to reflect the timing of revenue recognition and imputing lower margins. While introducing our FY21 net profit forecast at RM359.4mil.

• SimeProp disappointed us and market expectations in 6MFP18 with a net loss of RM318.7mil. This was mainly due to impairment of completed inventories and write-off of development expenditure for two projects where launches have been deferred, amounting to RM110.8mil and RM99.8mil respectively. The two projects are being replanned to respond to the current market demand. The results also included the impairment of long outstanding receivables of RM26.0mil. Excluding the exceptional items, the company still made a core net loss of RM82.1mil due to higher taxation.

• Meanwhile, the impairment and write-offs were partially mitigated by profit from the sale of land in Bandar Bukit Raja of RM122.7mil and improvement in contribution from Elmina, Denai Alam and Bandar Bukit Raja 2 & 3 townships and Cantara Residences.

• For the same period, the group’s share of loss from Battersea was RM7.7mil as compared with a profit of RM112.1mil recorded in the previous year. This was mainly due to only 3 units of Phase 1 delivered as compared to 494 units previously.

• The proposed disposal of the Phase 2 commercial assets by the Battersea Power Station to PNB and EPF is on track for completion by the end of 1Q2019. The completion of the proposed disposal would ease the group’s funding commitment for the remaining phases of the Battersea Power Station project. As for Phase 2 residential, which comprised 255 units of apartments and a GDV of RM3.9- 4.0bil, it will see completion by the end of 2020. Revenue profit recognition shall begin from 4QFY20 onwards. So far, 90% of Phase 2 properties have been sold.

• 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. SimeProp is gearing up its strategic campaign to promote new and completed developments by offering discounts and rebates while at the same time, review projects in its pipeline launches to ensure that the products are aligned to market demand.

Source: AmInvest Research - 28 Feb 2019