Highlights

• Sime Darby announced that it has aborted its plan to create a REIT platform through the reverse takeover of Saizen REIT (listed in Singapore), as it is not possible to complete the proposals by the long-stop date of the implementation agreement (i.e. by 31 Mar 2017).

• Recall, Sime Darby’s unit Hasting Deering Australia Ltd and Sime Darby Property Singapore Ltd had in Aug-16 initiated the reverse takeover of Saizen REIT, as part of its strategy to pare down borrowings and generate a recurring income stream. Under the agreement, Hasting Deering would inject 14 industrial properties into Saizen REIT (via a combination of cash and new share issuance), while Sime Darby Property Singapore would acquire an 80% stake in Saizen REIT’s manager, Japan Residential Assets Manager Ltd (JRAM).

Comments

• We are mildly negative on the latest development, as the aborted plan was aimed at unlocking the values of Sime Darby’s industrial property assets and allow greater flexibility in its future fund-raising exercises in building a sizeable international portfolio of assets.

Risks

• Delays in asset monetization exercise;

• Sharp fall in FFB output and/or palm product prices;

• Prolonged weak demand for mining equipment; and

• Delay in property launches.

Forecasts

• Maintained, as we had not incorporated the REIT proposal into our earnings forecasts, as details were sketchy when the deal was first announced (in mid-Aug 2016).

Rating

BUY ↔

• We keep our BUY recommendation on Sime, underpinned by: (1) Its plan to spin-off the plantation and property businesses, which would further crystalize Sime’s deep intrinsic value; (2) Recent completion of private placement, which has strengthened Sime’s balance sheet; and (3) Our anticipation of better quarters ahead on the back of better plantation and property earnings.

Valuation

• Maintain BUY with unchanged SOP-derived TP of RM10.06 (see Figure 1).

Source: Hong Leong Investment Bank Research - 13 Mar 2017