Highlights

According to Starbiz, Sime Darby is looking to acquire a Real Estate Investment Trust (REIT), which it will use for the injection of its commercial properties.

It is understood that Sime Darby had several months ago issued a request for proposal to several investment banks with regards to a potential acquisition of a REIT management company and had recently appointed a local investment bank as its sole principal adviser for the deal.

We note that Sime Darby currently has several commercial properties under its stable, and one of its more well-known and sizeable commercial properties is the Oasis Ara Damansara, which is a mixed commercial development comprising shop-offices, retail outlets and service apartments.

Among its upcoming commercial projects include: (1) Melawati Corporate centre (a planned 10-storey commercial building in Gombak, comprising 6 shops, 104 offices and 4 basement levels) will be ready by 2015; (2) Melawati Mall (a 50:50 JV project with CapitalMalls Asia), which will have a net lettable area of ~620k sqft, will be ready by end-2016; and (3) A 9-storey podium with offices and service apartments on a 2.2 acrea ha parcel along Jalan Kemajuan (a joint project with IOI).

In FY13, Sime Darby recorded PBIT of RM8.3m for its property investment sub-segment, which in turn accounted for 1.5% of the entire property segment’s PBIT of RM571.5m.

Pros/Cons

We believe such intention is positive for Sime Darby (if materializes), as it helps unlocking values of its commercial properties, particularly when the group is adding more commercial properties into its stable.

Earnings Forecasts

Maintained, pending further update with management.

Risks

• Sharp fall in FFB output and/or palm product prices at the plantation division;
• Prolonged weak demand for mining equipment; and
• Delay in property launches.

Rating

HOLD


Positives – Strong balance sheet.

Negative – (1) Cooling economic activities in China and Australia may have an adverse impact on Sime Darby’s earnings; and (2) Overseas expansion risk.

Valuation

Maintain SOP-derived TP of RM10.02 (see Figure 1).

Source: Hong Leong Investment Bank Research - 30 Jun 2014