- We maintain our BUY call for Sime Darby, with a fair value of RM11.20/share – a 10% discount to our SOP value of RM12.44/share.

- StarBiz Week reported that Permodalan Nasional Bhd (PNB) is looking at merging three of its biggest property companies – Sime Darby Property, S P Setia, and Island & Peninsular Sdn Bhd.

- Citing sources, the report said PNB is studying the possible move to amalgamate the three companies to create the largest property company in the country.

- S P Setia’s prospects are constrained by a limited amount of land due to the high rate of turnover that sustains cashflow for its operations. S P Setia has about 4,782 acres and 40 projects in five countries, while Island & Peninsular has pending developments on 5,165 acres.

- Sime Darby Property is the largest property developer in the country with 9,000 acres of land and has identified another 18,800 acres for future development.

- According to the report, Sime Darby has arguably the lowest cost of land because of the large plantations that it owns.

- The merged entity would overtake UEM Sunrise Bhd and IOI Properties Group Bhd as the largest property player on Bursa.

- Sime Darby officials have alluded to the possibility of spinning off the various divisions.

- We believe this speculated move to merge with other PNB companies to be a real and distinct possibility given the common major shareholder and the need to unlock value of Sime Darby’s landbank.

- Despite its huge landbank, property accounted for 11% of Sime Darby group’s EBIT in FY13 and only 7% for IHFY14.

- The group is targeting a PBIT of RM1bil by FY16 for the property division, mainly driven by the recognition of the Battersea project.

- We currently value Sime Darby’s property division at ~RM23bil, representing a 10% discount to the RNAV. The property segment makes up 31% of our SOP value for the group.

- Sime Darby currently faces external challenges in the industrial and motor divisions, while the palm oil division awaits growth to set in for its Liberia plantations. We maintain our numbers.

Source: AmeSecurities