Investment Highlights

• We maintain our HOLD recommendation on Sime Darby Property (SimeProp) with an unchanged fair value of RM0.64/share based on a 50% discount to its RNAV and a 3% premium for our 4-star ESG rating (Exhibits 2 & 3).

• SimeProp’s wholly-owned Sime Darby Property (Capital Holdings) Pte Ltd formed a 51:49 joint venture (JV) with LOGOS SE Asia Pte Ltd, Singapore, to establish a fund management platform focused on developing and investing in build-to-suit, leased or sale of assets to clients in the logistics sector.

• SimeProp expects to contribute a minimum RM2mil via internally-generated funds for the operations of the JV, which will source for equity funds of US$200mil (RM850mil) from accredited and institutional investors.

• We understand that SimeProp plans to sell a 177-acre site in Bandar Bukit Raja, Klang to the JV. While the selling price is still being evaluated by an independent valuer, the proceeds will be collected progressively over the next 3 years. Hence we keep our earnings forecast unchanged for now.

• Nevertheless, we estimate the book value of the land at RM24mil, which is 6.5% of the total net book value of 2,700 acres of land in Bandar Bukit Raja, Klang based on SimeProp’s 2020 annual report. Based on our channel checks, the current market valuation of RM160 psf translates to a huge potential net gain of RM900mil, 2.6x FY22F earnings while net gearing could improve from 26% to 16%.

• We are positive on the development as the group can leverage LOGOS’ specialist experience in managing logistics real estate. Besides, this would further enhance the recurring income stream in SimeProp’s investment and asset management segment while management aims to attain up to 30% of group earnings by 2025 from non-property developments. To recap, property investment and leisure accounted only 7% of the group’s total revenue in 1HFY21.

• Meanwhile, the JV will target logistics players like e-commerce companies, freight services provider and 3PL players by offering various industrial and logistics facilities such as warehouses, factories, cold storages and hybrids. As ecommerce gains popularity in tandem with the rising momentum of global trade recovery as economies, businesses and borders reopen, we believe these industrial property products and the new fund management model could generate positive contributions over the short and long term.

• While SimeProp is poised to ride on the sector recovery underpinned by launches in key townships such as City of Elmina, its current unbilled sales of RM1.8bil (+19% YoY from RM1.5bil) translate to only 0.7x of FY21F revenue. Hence, we view its potential upside as limited as the stock currently trades at a fair FY21F PE of 16x, near its 4-year peak.

Source: AmInvest Research - 30 Sept 2021