Investment Highlights

• We maintain our HOLD recommendation on Sime Darby Property (SimeProp) with an unchanged fair value of RM1.06 based on a 45% discount to RNAV (Exhibit 1). We made no changes to our FY19–21 earnings forecasts.

• In SimeProp’s analyst briefing yesterday, management highlighted key issues with regard to the group’s key focus and strategic plans for FY19 which include:

1) Demand-driven launches. Management has set a sales target of RM2.3bil for FY19. Given the soft and competitive market, management noted that new launches shall be aligned to market demand in relation to price, type, location and timing to ensure high take-up rates. Key focus will be mainly landed residential within the affordable to mid-range range (RM500K–RM800K) in Elmina, Bandar Bukit Raja and Serenia City.

2) Manage inventory levels. SimeProp will carefully review its new launches, taking into account of existing inventory level. SimeProp will put more effort on completed but unsold products of 883 units to improve working capital.

3) Unlock value from low-yielding assets and non-core land. The disposal of Darby Park Executive Suites in Singapore has been completed on 31 Jan 2019. SimeProp will make a gain of approximately RM204.3mil which will contribute positively to its FY19 earnings. SimeProp will continue with its efforts to reduce and monetise its non-core assets.

4) Expand income base. Management has a mid-to-long term plan to expand into more industrial, logistic and commercial projects as a way to increase recurring income. SimeProp will venture into industrial logistics development on a 39-acre site in Bandar Bukit Raja, via a JV with Mitsui & Co Ltd and Mitsubishi Estate Co Ltd. The project has received regulatory approvals and is now in the execution phase.

• To recap, SimeProp registered a net loss of RM318.7mil for 6MFP18, 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. Following the kitchen-sinking exercises, the group would be able to start on a clean slate for FY19 and have more flexibility to focus on its profitability, manage its inventories at a sustainable level, improve its cash management and strengthen its gearing profile.

• We maintain our view that the property market will remain subdued in short-to-medium term due to oversupply while many potential buyers are having difficulty in obtaining loans due to their already high debt service ratios. We believe the local residential property market still lacks major catalysts such as strong GDP growth and easing of lending policies to turn the tide.

Source: AmInvest Research - 1 Mar 2019