Highlights

• Sime Darby’s indirect subsidiaries, namely Hasting Deering (HDAL) and Sime Darby Property Singapore (SDPSL) entered into a framework agreement with Japan Residential Assets Manager Ltd (JRAM, manager of Saizen REIT) to dispose certain of its industrial properties in Australia to Saizen REIT (Properties), which would be master leased to HDAL, and SDPSL will be issued new units in Saizen REIT as part of the reverse takeover of Saizen REIT by SDPSL.

• Simultaneously, SDPSL inked a conditional share purchase agreement to acqui re an 80% stake in JRAM. SDPSL shal l be entitled a call option to acqui re the remaining 20% stake in JRAM 24 months after the completion of the JRAM acquisition.

• Following the properties disposal set out in the framework agreement, the parties shall commence negotiations and mutually agree on the terms of the definitive transaction agreement to be entered into between the parties by 30 Sep 2016.

• Upon completion of the proposed reverse takeover of Saizen REIT, the market capitalization of Saizen REIT is expected to be equal to at least S$300m, and SDPSL wil l own more than 30% of the enlarged issued unit capital of Saizen REIT on fully diluted basis (according to Saizen REIT’s announcement).

Comments

• Positive. While details remain sketchy, the latest move is in line with Sime Darby’s strategy to develop a REIT platform (hence generating recurring income stream). The move wil l also accord greater flexibility in its future fund-raising exercises to build a sizeable international portfolio of assets, which Sime Darby will benefit from its stake in Saizen REIT.

• Besides, the exercise allows Sime Darby to unlock value of its properties, which HDAL will continue its operations under the master lease, while de-leveraging its balance sheet.

Earnings Forecasts

• No change to our earnings forecast, pending completion of the transactions.

Risks

• Sharp fall in FFB output and/or palm product prices at the plantation division; and

• Prolonged weak demand for mining equipment .

Rating

HOLD

• Positives – Ongoing efforts in unlocking asset values.

• 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 HOLD recommendation with higher SOP-derived TP of RM7.70 (from RM6.95 previously), as we removed our 10% holding company discount on Sime Darby, given the latest exercise, which will unlock values of its properties to the group.

Source: Hong Leong Investment Bank Research - 16 Aug 2016