Sime Darby Property (SDPR) reported a surprise net loss of RM319m in 6MFY12/18. Key items contributing to the loss were RM211m impairment of inventories and RM273m tax expense, which includes a provision for additional tax charges by the IRB. The kitchen sinking allows the group to start on a clean slate in 2019. SDPR is restructuring its launch portfolio to focus on affordable housing but is likely to lead to a muted earnings rebound in 2019. We downgrade our call to SELL from Hold as the share price has run above our target price (TP) of RM1.04, based on 50% discount to RNAV. Potential downside is 10% to our TP.

Surprise Loss

SDPR incurred a net loss of RM319m in 6MFY12/18 compared to net profit of RM560m in the same period last year. This was a surprise as we forecasted a net profit of RM90m. We did not expect the massive net exceptional loss of RM258m and high taxation expense of RM273m. Revenue was RM1.27bn in 6MFY12/18 and EBIT was RM251m (EBIT margin of 19.8%), indicating that core operations were profitable. But the share of joint venture/associates losses of RM47m, mainly due to the Battersea Power Station integrated development project in London, was a drag on earnings.

Decent Sales in a Slow Market

SDPR achieved net sales value of RM1.34bn in 6MFY12/18, up 33% yoy. It launched 801 units of landed homes with gross development value (GDV) of RM676m in Bandar Bukit Raja, Serenia City, Nilai Impian and Elmina West priced in the mid-range between RM500-800k per unit. Unbilled sales of RM2.2bn will support earnings in 2019-2021. It also divested the Darby Park Executive Suites in Singapore for a disposal gain of RM204.3m.

Downgrade to SELL

We maintain our core EPS forecasts and expect the group to return to the black in 2019. But earnings forecast risk remains given the risk of further impairments for its substantial inventories of RM4.63bn (RM0.87bn completed units, RM4.62bn ongoing development). We downgrade our call on SDPR to SELL from Hold as the share price has run above our TP of RM1.04, based on 50% discount to RNAV. Key upside risks are earnings upside risk from disposal of non-core assets.

Source: Affin Hwang Research - 28 Feb 2019