Sime Darby Property (SDPR) saw an earnings rebound, recording a net profit of RM265m in 1Q19 compared to a net loss of RM347m in the previous quarter. This was above market and our expectations. There was a RM203.4m one-off gain from the disposal of Darby Suites Executive Condominium in Singapore. Core net profit jumped 159% yoy to RM61m driven by high-margin product mix and revenue growth. We revise up our core EPS forecasts by 4% in 2020-21E to reflect higher interest income from proceeds of the disposal. We upgrade our call to HOLD from Sell following the correction in the share price with a slightly higher target price of RM1.05, based on 50% discount to RNAV.

Substantial One-off Gain

Net profit of RM265m (+687% yoy) in 1Q19 exceeded our previous full-year forecast of RM166m and comprises 56% of market consensus estimate. We did not factor in the RM203.4m one-off gain from the disposal of Darby Suites. We lift our 2019E net profit forecast by 123% to RM370m to reflect the one-off gain but keep our core net profit forecast unchanged at RM165m. Core net profit of RM61m in 1Q19 is about 37% of our forecast. There is potential upside to our earnings forecasts if the revenue growth momentum is sustained. SDPR also sold 300 acres of land in Bukit Selarong, Kedah in May 2019, which will be recognised in 2Q19 (gain not disclosed and hence not included in our forecast yet).

Decent Sales in a Slow Market

SDPR launched a total of 1,074 units under its Primetime 8 Campaign with total gross development value (GDV) of RM913m in March-April 2019. It remains confident of achieving its sales target of RM2.3bn in 2019. Unbilled sales of RM2.1bn will support earnings in 2019-2021.

Upgrade to HOLD

We upgrade our call on SDPR to HOLD from Sell. We believe the correction in share price by 9% over the past month has reflected concerns on its earnings visibility. Earnings will be supported by gains from sale of land and investment properties in 2019. But earnings visibility remains weak in 2020-21E due to competitive pressure on profit margins. Maintain HOLD. Key upside risk is potential earnings upside from disposal of non-core assets.

Source: Affin Hwang Research - 30 May 2019