Investment Highlights

• We maintain our BUY recommendation on Sime Darby Property (SimeProp) with a higher fair value (FV) of RM0.63/share from RM0.62/share based on an unchanged 55% discount to its RNAV and a 3% premium for our 4-star ESG rating (Exhibits 4, 5). We raise our FV after factoring in future earnings contribution from the development of the recently acquired Kapar land.

• We maintain our FY22F earnings but lower FY23F/FY24F core net profit by 3% to incorporate higher finance cost from the increase in borrowings to fund the Kapar land acquisition.

• Recall that Sime Darby Plantation (SDP) granted SimeProp 9 call options with a 5-year window period starting from November 2017 to purchase its land which covers 11,805 acres (Exhibit 3).

• Before the expiry of the call options on November 2022, SimeProp plans to exercise 1 of it to acquire a 949-acre freehold agricultural land situated in Kapar, Selangor (also known as Sungai Kapar Estate) for RM618mil (Exhibit 2).

• The acquisition will be funded by a combination of bank borrowings and internally generated funds. As at June 2022, SimeProp has RM820mil in cash with a net gearing ratio of 0.30x. We expect the group’s gearing ratio to rise to 0.36x assuming that the total purchase consideration of RM618mil will be fully funded by debt.

• While there were not many similar property transactions recently, the asking price for the agricultural land surrounding the area ranges from RM19 psf to RM20 psf. Hence we deem the acquisition price of RM15 psf as fair.

• The Kapar land, which is adjacent to its existing industrial township, Bandar Bukit Raja (BBR) 3 (Exhibit 1), serves as an expansion to the huge development. We anticipate SimeProp to build a mixed township that will be developed with industrial and residential components, under project BBR 4.

• Pending further details on the land acquisition, we expect that BBR 4 will have an estimated gross development value (GDV) of RM7.6bil, based on a GDV of RM8mil per acre from BBR 2 & 3. BBR 4 could potentially contribute up to 9% of SimeProp’s earnings from FY25F to FY30F with BBR 4 scheduled to debut in FY25F.

• Meanwhile, we saw a good take-up rate on SimeProp’s earlier launches in BBR projects. The first phase of BBR 3, which included 39 industrial lots with a GDV of RM620mil, was well received with a commendable take-up rate of 85% as at 7 August 2022.

• The proposed acquisition, expected to be completed by 1HFY23, is subject to shareholders’ approvals in the extraordinary general meeting in November/December 2022.

• Overall, we are positive on the acquisition which helps to sustain SimeProp’s property earnings over the medium term. The stock currently trades at an undemanding FY23F PE of 13x vs. its 2019 pre-pandemic mean of 14x and offers a fair FY23F dividend yield of 3%.

Source: AmInvest Research - 30 Aug 2022