Investment Highlights

• We upgrade Sime Darby Property (SimeProp) to BUY from HOLD with a higher fair value (FV) of RM0.62/share from RM0.59/share based on an unchanged 55% discount to its RNAV and a 3% premium for our 4-star ESG rating (Exhibits 8, 9). We raise our FV after appraising a higher valuation of investment properties and lowering net debt by 4% in our RNAV calculations.

• SimeProp’s share price has dropped by 21% over the past 3 months as a result of heightened concern over weakening property outlook arising from interest rate hikes, rising building material cost and industry-wide labour shortages.

• Nevertheless, with the softening of commodity prices since June 2022, coupled with the gradual easing of industry-wide labour shortages following the reopening of international borders, we expect a gradual 2HFY22 improvement in Malaysia’s property outlook.

• SimeProp’s 1HFY22 core net profit (CNP) of RM106mil was below expectations, making up 42% of our FY22F earnings and 47% of consensus estimate. We make no changes to our forecasts on expectations of an improvement in labour market conditions in 2HFY22, which will accelerate the progress of property development activities and consequently translate into higher progress billings.

• In 1HFY22, the group’s property development segment’s operating profit declined 3% YoY. This was dragged by a 2% drop in revenue as a result of lower on-site development activities in City of Elmina and Kuala Lumpur Golf & Country Club (KLGCC) Resort. Earnings from property development were further weighed down by lower sales of completed stocks in KLGCC Resort, Taman Melawati and the KL East township.

• SimeProp secured new sales of RM1.9bil (+48% YoY) in 1HFY22, attaining 73% of its FY22F sales target of RM2.6bil (Exhibits 3, 4, 5). As a result of the stronger-than-expected 1HFY22 sales performance, we expect SimeProp to surpass its FY22F sales target given the continuous robust take-up rate and the group’s planned launches worth RM1.3bil in 2HFY22F.

• The 2HFY22F planned launches are likely to be residential landed and high-rise products from the established mature townships, which have a proven track record of strong takeup rate.

• Furthermore, its strong bookings of RM1.6bil as at 7 August 2022 (vs. RM1.5bil as at 8 May 2022) and high bookings to sales conversion rate of 70%–80% further support our view that FY22F sales target could be exceeded.

• Meanwhile, the group’s unbilled sales expanded 89% YoY to RM3.4bil, which represented a cover ratio of 1.2x of FY22F revenue (Exhibits 3 & 4). The key contributors to unbilled sales are its high-rise products at Jendela Residences and Maya Ara Residences, as well as industrial products at Bandar Bukit Raja and XME Business Park.

• SimeProp’s 1HFY22 launches of RM1.5bil (vs. RM1.6bil in 1HFY21) accounted for 54% of its FY22F targeted launch of RM2.8bil (Exhibit 5). As at 7 August 2022, SimeProp recorded a commendable 94% take-up rate for its newly launched (1HFY22) residential landed property and 82% for industrial properties (Exhibit 6).

• We observe a declining trend in SimeProp’s inventory level, down 53% to RM320mil in 2QFY22 from RM675mil in 2QFY20 (Exhibit 7). QoQ, the modest increase of 6% in its 2QFY22 completed inventory was primarily due to the improvement in site progress works at its major townships starting June 2022. The main components under completed inventory are its industrial products in Elmina East and commercial products in Bandar University Pagoh.

• The property investment segment’s 1HFY22 operating profit surged 96% YoY driven by higher contributions from KL East Mall. 1HFY22 saw an improved occupancy rate of 80% vs. 73% in 1HFY21, as well as increased footfall (+70% YoY). This was further supported by the improved share of results of Melawati Mall, which also recorded a higher footfall (+37% YoY) in 1HFY22.

• The leisure segment’s turnaround to a 1HFY22 operating profit of RM200K (from 1HFY21 operating loss of RM6.2mil) was due to more events and functions held following the easing of movement restrictions and resumption of business activities. In addition, the full disposal of its loss-making 65%-owned subsidiary, OSC Sunrise, has also enhanced its operating profits following its deconsolidation after the disposal was completed on 10 February 2022.

• QoQ, the group’s 2QFY22 CNP rose 30%, mainly driven by a 36% increase in 2QFY22 property development’s operating profit. This was primarily attributed to stronger development site progress works at its major townships (namely City of Elmina, Elmina Business Park, Serenia City and Hamilton Nilai City) as a result of improving labour market conditions since June 2022.

• Meanwhile, the leisure segment returned to the black with an operating profit of RM1mil due to increased activities in golfing, banqueting and other events during the festive season. Property investment’s 2QFY22 operating profit declined 3% QoQ despite a 7% increase in revenue primarily due to higher operating costs.

• We are positive on the outlook for SimeProp, premised on:
  (i) its sizable landbank (15,400 acres) located strategically on the west coast of Peninsular Malaysia with a gross development value (GDV) of more than RM100bil;
  (ii) SimeProp's ability to launch in-demand products at the right price points in strategically located townships, which has been proven by its strong take-up rate of 89% for its 1HFY22 new launches and an average take-up rate of 88% from FY19-21;
  (iii) the official launching of Battersea Power Station in 2HFY22, which would potentially drive up its residential sales and commercial leases at The Power Station and Electric Boulevard; and
  (iv) its venturing into fast-growing industrial land development through the establishment of an industrial development fund together with LOGOS property to build an integrated logistics park in Bandar Bukit Raja, Selangor. The fund is projected to generate recurring income (fund management fees and leasing income) starting FY23 following the expected completion of the first phase of the integrated logistics park in June 2023.

• The stock currently trades at a compelling FY23F PE of 12x vs. its 2019 pre-pandemic valuations of 14x and offers a fair FY23F dividend yield of 3%.

Source: AmInvest Research - 26 Aug 2022