We See Improvements, But Still Short

Sime Darby Property (SDPR)’s 9MFY18 headline net profit doubled to RM593m on higher gain from disposals of assets and improved underlying earnings from its property development business. In particular, we observe notable margin improvement in the property development business in 3QFY18. That said, the group’s overall earnings still came in below market and our expectations. We put our earnings forecasts, rating and target price under review.

Higher 9MFY18 net profit (+100% yoy) driven by higher gains from sales of associates / subsidiaries and lumpy gain from land sales

SDPR’s 9MFY18 net profit came in higher at RM593m driven by lumpy disposal gains from sales of subsidiary, an associate and land bank. Excluding the lumpy gains (sales of associates, investment, subsidiaries, land), associates contributions (Battersea project) and write-down of property inventories, the underlying EBIT margin for its property development business recovered for -2% in 9MFY17 to 8% in 9MFY18. The stronger property development results were driven by higher sales and development activities at its core township projects: Elmina West, Elmina East, Serenia City, Taman Melawati and Serenity Cove (Australia). Notwithstanding the margin uptick, SDPR’s results were still short of market and our expectations.

Sequentially, 3QFY18 net profit fell by 76% due to lower contributions from Battersea, absence of land sales gain

Sequentially, SDPR’s 3QFY18 net profit came in lower at RM34m (-76%) due to absence of large land sales gains (RM84m gain in 2Q18 on sale of New Lunderston Estate) and a share of loss from Battersea (-RM9m) compared to share of profit of RM25m in the prior quarter, following the handover of the remaining units of Phase 1 to the purchasers. We note that the Sime-Setia-EPF JVCo has now delivered most of the units for Battersea Phase 1 (contributed RM103m in 9M18; RM87m in 9M17), the JVCo will likely report losses in the coming quarters due to lower numbers of units handover.

Under Review

We put our rating, price target and earnings forecasts under review, pending a meeting with management. This note marks a transfer of coverage.

Source: Affin Hwang Research - 25 May 2018