Investment Highlights

• We upgrade Sime Darby Property (SimeProp) to BUY from HOLD with a higher FV of RM1.05 (from RM1.03) based on a 45% discount to RNAV (Exhibit 2). We cut our FY19–FY21 net profit forecasts by 9.9%, 7.1% and 16.2% respectively to reflect the timing of revenue recognition. Our BUY recommendation upgrade is to reflect the recent sharp downtrend in its share price which currently offers a potential upside of over 30% while fundamentals persist.

• SimeProp registered a 1HFY19 net profit of RM470.3mil (+474.9% YoY). This is mainly due to gains on the disposals of Darby Park Executive Suites, Singapore, investment properties in the UK, and other gains totalling RM264.7mil. Stripping off these exceptional items, the company’s 1HFY19 core net profit of RM205.7mil (+156.3% YoY) came in above our expectation but within consensus at 60% and 49% of our and consensus full-year estimates respectively.

• The property development’s operating profit improved significantly by 410.1% YoY to RM248.6mil mainly on higher contributions from Bandar Bukit Raja, Denai Alam, Nilai Impian/Utama townships and Cantara Residences in Ara Damansara but lower contributions from Elmina and Bandar Universiti Pagoh townships dragged earnings.

• SimeProp’s share of losses from JVs and associates of RM11.4mil is significantly lower than previous year’s RM22.1mil mainly attributable to the 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. As at 1HFY19, total unbilled sales stood at RM1.5bil vs’ QoQ’s 2.1bil. SimeProp secured new sales of RM1.4bil, mainly contributed by attractive pricing strategies and successful marketing campaigns of Primetime 8 and Pop Raya.

• We remain cautious on the property sector due to: (i) the generally still elevated home prices; (ii) the low loan-tovalue (LTV) offered by banks; and (iii) house buyers' inability to qualify for a home mortgage due to their already high debt service ratios (DSR).

Source: AmInvest Research - 29 Aug 2019