Investment Highlights

• We maintained our HOLD recommendation on Sime Darby Property (SimeProp) with a lower fair value of RM1.03 (from RM1.06) based on a 45% discount to RNAV (Exhibit 2). We cut our FY19–FY21 net profit forecasts by 19.4%, 8.3% and 5.5% respectively to reflect the timing of revenue recognition.

• SimeProp registered a 1QFY19 net profit of RM265.1mil (+687.3% YoY). This is mainly due to gains on the disposals of Darby Park Executive Suites, Singapore, investment properties in the United Kingdom and other gains totalling to RM204.4mil. Stripping off these exceptional items, the company’s 1QFY19 core net profit of RM60.7mil (+89% YoY) came in below our and market numbers, at 18% and 14% of ours and consensus full-year estimates respectively.

• On a positive note, the property development’s operating profit improved significantly by 31.8% YoY to RM69.9mil mainly due to higher contribution from Bandar Bukit Raja, Denai Alam, Nilai Impian/Utama townships and Cantara Residences in Ara Damansara; however, lower contribution from Elmina and Bandar Universiti Pagoh townships dragged down the earnings.

• Meanwhile, SimeProp’s share of JV/associates reported profit of RM1.8mil compared to a loss of RM18.9mil YoY mainly attributable to the higher contribution from PJ Midtown and lower share of losses from Battersea and Sime Darby Sunrise JVs.

• Following the completion of the disposal of the Battersea Power Station Phase 2 Commercial Assets on 14 March 2019, SimeProp does not expect further equity commitment for the commercial asset development for FY19. Meanwhile the company had completed the disposal of 300 acres of land in Bukit Selarong, Kedah in May 2019, which will be recognized in 2QFY19. As at 1QFY19, total unbilled sales stood at RM2.1bil.

• Our HOLD recommendation is also due to: 1) the limited upside on the share price; 2) a generally weak investor sentiment on the property sector, particularly among larger developers; 3) still sluggish demand for local properties; and 4) a risk of worsening market conditions in the UK.

• We may upgrade the stock to a BUY if: 1) there’s a sharp retracement in share prices while fundamentals persist; 2) a general improvement in demand for local properties; and 3) major catalysts such as M&A and sales/earnings surprises.

Source: AmInvest Research - 30 May 2019