Highlights

Sime Darby announced that it has entered into a sale and purchase agreement with Eastern & Oriental Bhd (E&O) to dispose 135 acres of freehold land for RM239.8m.

Recall in Sep 2013, both parties entered into a memorandum of agreement to negotiate the terms of the sale and purchase agreement. The land, which will have a freehold title, will be carved out of the 843-acre land held by Sime Darby, which in turn forms part of the City of Elmina townships (located along the Guthrie Corridor Expressway).

The proposed development on the land will have a baseline GDV of RM1.5bn (consisting residential and commercial units). It is expected that the actual GDV of the development will potentially be higher than the baseline GDV. As part of the agreement, E&O agreed to share the amount of the actual GDV that exceeds the baseline GDV with an agreed sharing ratio of 80:20.

Comments

Based on our estimates, Sime Darby will be registering a gain of RM142m from the disposal (which we consider as non-recurring), assuming the average net book value of 50 sen psf for Sime Darby’s land bank in Elmina estate and tax rate of 25%.

We are positive on the latest development as the disposal allows Sime Darby to enhance the combined branding and value of the City of Elmina through E&O’s reputation as a niche luxury lifestyle developer, and at the same time accelerates Sime Darby’s development of the City of Elmina.

Moreover it will still enjoy 22% of the future contribution from the said land (from E&O) as well as 20% additional GDV above the baseline GDV.

Earnings Forecasts

Maintained.

Risks

• Earlier-than-expected recovery in edible oil demand and prices; and
• Weather uncertainties revisit, which would have a positive impact edible oil prices.

Rating

HOLD


Positive – Strong balance sheet.

Negatives – (1) Weak global economic outlook, coupled with the impending excess supply of CPO will affect both demand and prices of CPO; (2) Cooling economic activities in China and Australia may have an adverse impact on Sime Darby’s earnings; and (3) Overseas expansion risk.

Valuation 

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

Source: Hong Leong Investment Bank Research - 7 Jul 2014