Investment Highlights

• We maintain BUY on Sime Darby Property (SimeProp) with a higher fair value (FV) of RM0.95/share (from RM0.83/share previously), based on a 45% discount to our revised RNAV- based valuation, which implies FY25F PE of 16x, close to the average of 7 larger cap property stocks currently. We made no changes to our 4-star ESG rating , which accords a 3% premium to our FV.

• SimeProp’s FY23 core net profit (CNP) of RM387mil (after excluding the one-off gain from land sale of RM53mil) came in well above expectation. It was 25% above our earlier forecast and 9% above street’s.

• The variance to our forecast was mainly due to stronger-than- expected contribution from its property development segment. Meanwhile, SimeProp recorded a lower-than- expected finance cost, attributed to a change in accounting treatment for interest cost associated to its retail assets under construction being capitalised. We expect that the interest cost associated with the borrowing for the construction of retail assets will be expensed in profit & loss upon completion by the end of FY24 or FY25.

• Nevertheless, we raise FY24F/FY25F CNP by 11% to account for stronger-than-expected revenue from its property development segment in view of improved labour market resulting in increased on-site development activities in major townships.

• In FY23, the group’s property development revenue grew 27% YoY to RM3.2bil while PBT rose 8% YoY to RM525mil. The stronger revenue from higher on-site development activities of its Malaysian projects, coupled with contribution from RM86mil sale of lands in Negeri Sembilan and Kedah, generated PBT of RM70mil and PAT of RM53mil.

• SimeProp’s FY23 new sales of RM3.3bil (-10% YoY) has exceeded its earlier target of RM2.7bil . The main sales contributors in FY23 were residential landed properties (36%), industrial (31%) and residential high-rise (27%) .

• SimeProp’s FY23 launches was in line with its targeted launches of RM4bil. This consists of a diverse mix of residential landed properties (38%), residential high-rise components (34%), industrial offerings (17%) and others (11%).

• For FY24F, management is setting a prudent sales target of RM3bil (-10% YoY vs. actual FY23 sales), supported by FY24F planned launches of RM3.9bil. Despite a lower sales target for FY24F, it is important to note that Sime Prop has a track record of guiding sales prudently.

• Over the past 2 years, SimeProp has consistently surpassed its initial sales target set earlier in the year with FY22 actual sales of RM3.7bil vs. initial target of RM2.6bil. Likewise, FY23 actual sales reached RM3.3bil vs. sales target of RM2.3bil.

• As at 4th February 2024, SimeProp achieved a strong average take-up rate of 80% for all its products launched in FY23. Residential landed products recorded a notable average take-up rate of 77% while industrial offerings achieved an average take-up rate of 92%. For residential high-rise, the take-up rate was 74%.

• The group’s strong bookings of RM2.2bil (-14% QoQ) as at 4 February 2024 and high bookings-to-sales conversion rate of 70%–80% will further support FY24F sales prospects.

• QoQ, the group’s unbilled sales were RM3.6bil (-3% QoQ), which represents a fair cover ratio of 0.95x FY24F revenue . In view of the acceleration of construction progress given the recovery in number of foreign workers, we anticipate 40%-50% of its unbilled sales will be recognised in FY24F.

• YoY, the property investment segment’s FY23 PBT halved despite a flat revenue. This was mainly due to recognition of share of loss of RM29mil (vs. share of profit of RM40mil in FY22) from joint ventures and associates. The loss was mainly attributed to fair value loss on investment properties and higher finance costs incurred by a joint venture.

• The leisure segment’s FY23 loss was RM1mil vs. PBT of RM11mil in FY22, mainly due to rising operating costs and expenses incurred on intensifying golf course maintenance activities ahead of the Ladies Professional Golf Association tournament in October 2023.

• QoQ, the group’s 4QFY23 CNP surged 68% to RM163mil from RM98mil in 3QFY23 (excluding lumpy contribution from RM86mil land sale which generated PBT of RM70mil and PAT of RM53mil). This was mainly attributed to increased on-site development activities and higher progress billings from its integrated development townships.

• Overall, we are positive on the outlook for SimeProp, premised on:
  
  (i) its sizeable landbank (14,800 acres) located strategically on the west coast of Peninsular Malaysia with a gross development value (GDV) of RM115bil;
  
  (ii) SimeProp's ability to launch in-demand products at the right price points in strategically located townships, which have been proven by a strong take-up rate of 80% for FY23 new launches and average take-up rate of 88% in FY19- 22;
  
  (iii) its venture into fast-growing industrial land developments 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 from fund management fees and leasing income, starting from FY24F with the expected completion of the first phase of the integrated logistics park this year.

• The stock currently trades at a compelling FY25F P/E of 12x vs. its 2018-2019 pre-pandemic valuations of 17x and offers a fair dividend yield of 4%.

Source: AmInvest Research - 26 Feb 2024