Sime Darby Property (SDPR) is listing under the Main Board Property Sector on 30 November 2017 as part of Sime Darby group’s pure play strategy to create 3 separate listed entities. SDPR has good land bank close to major cities and towns in Peninsular Malaysia that was acquired at low historical cost. However, SDPR’s forward earnings will remain volatile due to one-off disposals of assets and core FY18E PER of 32x, based on listing reference price of RM1.50, is not attractive. We initiative coverage on SPDR with a HOLD call and 12-month target price (TP) of RM1.61, based on a 50% discount to RNAV.

Massive Land Bank

SDPR has well-located land bank in Peninsular Malaysia measuring a total of 20,763 acres with gross development value of RM100.4bn. It is currently undertaking 23 township, integrated and niche property development projects on 12,026 acres (58% of total land bank). Another 8,737 acres of land are for future development.

Focus on Township Development

SDPR chalked up RM528m sales in 1QFY18. The company is focusing on selling its inventories of completed units, while launching new phases selectively for its existing townships. It is targeting to achieve RM1.9bn sales in FY19E, about the same level achieved in FY18. Unbilled sales is RM1.78bn as at end-1QFY19, which will support earnings in FY19E.

Earnings Sustainability Concern

Earnings for SPDR have been supported by gains from sale of investment properties, land, subsidiary/associate stakes. It recently sold 40% of Sieramas and 100% of Malaysian Land Development Co. to reap one-off gains of RM319m. We believe property development earnings is insufficient to support its high continuing operations earnings base of RM561-749m in FY15-17. Hence, earnings sustainability is a concern.

Initiate With a HOLD Call

We initiate coverage on SDPR with a HOLD call and a target price of RM1.61, based on 50% discount to RNAV. The discount is within the 30- 50% range that we apply for other property under our coverage. Key upside/downside risk to our call are: (1) higher/lower property sales; (3) interest rate cut/hike which will affect financing costs and affordability.

Source: Affin Hwang Research - 30 Nov 2017