Investment Highlights

• We maintain our HOLD recommendation on Sime Darby Property (SimeProp) with a higher fair value of RM0.67/share (vs. RM0.64/share previously) based on a 50% discount to the increased RNAV and a 3% premium for our 4-star ESG rating (Exhibits 1 & 2).

• The RNAV increase by 4% to RM8.9bil stems from SimeProp’s acquisition of a 760-acre parcel of freehold land in Labu, Seremban from Sime Darby for RM280mil, which is expected to be settled within 3 months from now. The deal is a related party transaction.

• The acquisition price translates to RM8.46 psf which is within the range of RM6–10 psf for agricultural land in the surrounding area. This is a smaller piece of land compared to SimeProp’s earlier 1,540-acre Elmina Business Park development in Sungai Buloh, Selangor which carries a gross development value (GDV) of RM6.6bil or RM4.3mil/acre.

• Given that the current industrial land price in Sungai Buloh (+ RM100 psf) is over 2x vs. Labu (RM28–RM50 psf), a 50% discount to Elmina Business Park translates to an indicative GDV of RM1.6bil for this new acquisition.

• SimeProp plans to develop a holistic industrial development product in line with its development pipeline in Malaysia Vision Valley. However, the group did not disclose details such as the GDV or timeline of its product launchings. We expect a minimal impact to our FY22–23F earnings if the initial project launches commence by next year. Post-acquisition, the group’s FY21F net gearing will increase from 27% to a still manageable 30%.

• We are positive on the development which accelerates the diversification of SimeProp’s product streams by expanding its industrial portfolio. To recap, 18% of the group’s 1HFY21 total sales came from industrial products, which is the 2nd largest contributor after landed residential properties (51%). This is underpinned by the strong sales in Elmina Business Park which contributed 69% to the industrial segment. The completion of the NilaiLabu-Enstek road is expected to enhance the connectivity of the land in Labu.

• 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. Its potential upside is limited as the stock currently trades at a fair FY21F PE of 18x, above its 4-year peak.

Source: AmInvest Research - 28 Oct 2021