Investment Highlights

• We maintain BUY on Sime Darby Property (SimeProp) with an unchanged fair value (FV) of RM0.68/share, which implies an FY24F PE of 13x, close to the average of the larger cap property stocks currently. Our FV is based on a 55% discount to our RNAV and a 3% premium for our 4-star ESG rating (Exhibits 12, 13).

• We also maintain forecasts and sales take-up assumptions following our visit to SimeProp’s Bandar Bukit Raja (BBR) townships in Klang.

• BBR is an industrial township spanning across 5,294 acres in West Klang Valley (Exhibits 1 & 2). It boasts a diverse composition, encompassing industrial areas (58%), residential housing (28%) and commercial lots (14%).

• As at April 2023, SimeProp has successfully launched 32% of the total gross development value (GDV) of RM23bil within BBR. The remaining GDV of RM16bil is expected to contribute positively to SimeProp’s property development earnings until 2040 (Exhibit 3).

• BBR will be divided into 4 phases with BBR 1 being the first phase launched in 2002. BBR 1 is now largely developed, with only 2% of the land bank remaining undeveloped, which will be utilised for the development of commercial properties. Notably, all the projects launched within BBR 1 have been fully taken up.

• BBR II, introduced in 2018, has demonstrated a remarkable track record of success for its residential offerings. SimeProp has consistently achieved a high take-up rate of >90% for units that have been launched for >1 year (Exhibit 4).

• In 1HFY23, SimeProp launched residential properties worth RM196mil in BBR II (Nadira 3 and Casira 3 Series 1) with a takeup rate of >75%. In 2HFY23, SimeProp has scheduled the launch of RM236mil worth of residential properties in BBR II (Exhibit 4). These properties are expected to be double-storey terrace homes with designs and features similar to the previous phases.

• For industrial properties in BBR II, the majority of industrial lands have been launched, with only 1 acre out of the total 267 acres of industrial lands remaining available (Exhibit 6).

• SimeProp launched the first phase of BBR III in June 2022, comprising 128 acres of industrial plots with a GDV of RM639mil, which have been fully sold. In 4QFY23, SimeProp plans to launch ready-built detached factories in BBR III with a GDV of RM294mil. Notably, SimeProp will introduce its first BBR build-to-lease components in BBR III, accounting for 20% of the total land size in BBR III. This recurring income component is expected to provide earnings stability for SimeProp in the future.

• Riding on the success of BBSAP 1 and II, SimeProp has set its sight on launching the first phase of BBR IV in 2024, which will be situated on a newly-acquired Kapar land. IBBR IV industrial park is designed to be an ESG-focused industrial development with a green rated industrial park, quality landscape with carbon sink species and eco-mobility such as electric vehicle (EV) charging stations. The target customers for BBR IV will primarily be multinational corporations (MNCs) and prominent industrial players with priorities on ESG initiatives. By incorporating ESG efforts, SimeProp aims to command a higher premium for its products.

• Despite the rising cost of building materials since the Covid period, BBR has managed to maintain a relatively stable net development profit (NDP) margin (Exhibit 4). This was attributed to the township's ability to pass on the cost increase to customers, allowing for potential upward adjustments in selling prices. While the prices of houses in new phases may be higher, we anticipate demand to remain resilient due to BBR's strategic location and the developer's strong reputation.

• In spite of the slowdown in global trade growth, real estate consultancy firm Rahim & Co foresees continued strong demand for industrial properties this year, albeit in distinct market segments. Specifically, there is growing demand for highly efficient manufacturing facilities and fully integrated industrial parks. Additionally, many industrial areas on the fringes of the city are ageing and experiencing congestion issues, while industrial land in densely populated regions are becoming more costly. Hence, factory owners, particularly those in the Klang area, are likely to consider upgrading their ageing plants and relocating operations, which are expected to drive increased demand for industrial properties in BBR.

• BBR is targeting the light and medium industry segments for its industrial component, catering to a diverse range of buyers from sectors such as food, machinery, automation and hygiene products. This diversified approach helps mitigate the potential impact of a global trade slowdown. To date, BBR has garnered attention from prominent industry players such as Big Dutchman and CJ Century to establish factories and warehouses in BBR (Exhibit 9).

• In 1QFY23, BBR accounted for RM842mil or 23% of SimeProp’s total unbilled sales of RM3.6bil, representing the second largest revenue contributor to SimeProp after the City of Elmina township. We expect BBR’s unbilled sales in 1QFY23 to be mostly recognised over the next 3-4 years.

• BBR is strategically located within a 20km radius of Port Klang, the world's 12th busiest container port. It also offers excellent connectivity via major highways like New Klang Valley Expressway (NKVE), Federal Highway, SHAPADU and West-Coast Expressway.

• Notably, BBR township is adjacent to the Kapar station along the East Coast Rail Link (ECRL) line (Exhibit 11). The ongoing ECRL project is scheduled for completion by the end of 2026. It will link the East Coast states with the western Klang Valley region. Once the ECRL is fully operational in 2026, we anticipate significant benefits for the BBR township as a whole. The improved connectivity and enhanced mobility offered by the ECRL will stimulate economic activities and potentially lead to an increase in population within the township. Moreover, the improved transportation infrastructure may also have a positive impact on property prices, providing an additional boost to the overall value and desirability of the BBR township.

• Overall, we are positive on the outlook for SimeProp, premised on:
  (i) its sizeable 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 a strong take-up rate of 90% for its FY22 new launches and an average take-up rate of 88% in FY19-22;
  (iii) the official launching of Battersea Power Station in 2HFY22, which would potentially drive up residential sales and commercial leases at The Power Station and Electric Boulevard; and
  (iv) its venture 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 FY23F, following the expected completion of the first phase of the integrated logistics park in 4Q2023 (Exhibit 10).

• The stock currently trades at a compelling FY24F PE of 9x vs. its 2019 pre-pandemic valuations of 14x and offers a compelling dividend yield of 5%.

Source: AmInvest Research - 13 Jul 2023