Sime Darby Property’s (SDPR) 2Q19 result was a positive surprise. Net profit jumped 486% yoy to RM470m in 6M19, driven by higher property development earnings and net exceptional gain of RM231m. SDPR achieved sales of RM1.4bn (+20% yoy) in 6M19 following aggressive marketing campaigns. We upgrade our core EPS forecasts by 24-86% in 2019-21E to reflect higher progress billings for ongoing township development projects. We upgrade our call to BUY from Hold with unchanged target price (TP) of RM1.05, based on 50% discount to RNAV.

Substantial One-off Gain

Net profit of RM470m (+486% yoy) in 6M19 exceeded our market consensus and our previous full-year forecasts of RM421m and RM370m respectively. We were surprised by the high one-off gains and strong property development earnings contribution. Core net profit increased 7-fold yoy to RM239m, driven by higher progress billings on ongoing projects, sale of inventories and new property launch sales. SDPR sold 300 acres of land in Bukit Selarong, Kedah in May 2019, which generated a one-off gain of RM81m. This boosted net exceptional gain to RM231m in 6M19, partly offset by RM59m impairment and provisions recognised.

Decent Sales in a Slow Market

SDPR launched 2,082 units of new properties worth RM1.2bn with further launches planned to meet its RM2.0-2.5bn target in 2019. It achieved RM1.4bn sales in 6M19 and is on track to meet its target sales of RM2.3bn in 2019. Unbilled sales of RM1.5bn (+4% yoy) and total unsold and launched units worth RM4.44bn will support sales and earnings in 2019-2021E. It is also targeting to complete the sale of 1.16-acre freehold land at Jalan U-Thant, Kuala Lumpur and 2 units of holiday bungalows on 1.71-acre freehold land at Pulau Tikus, Penang, in 4Q19 (not included in our earnings forecast).

Upgrade to BUY

We upgrade our call on SDPR to BUY from Hold with unchanged TP of RM1.05, based on 50% discount to RNAV. We believe the correction in share price by 20% over the past month has reflected concerns on its earnings visibility. Earnings will be supported by rising property sales and gains from sale of land and investment properties in 2019. Key downside risk is volatile earnings due to lumpy sales of non-core assets.

Source: Affin Hwang Research - 29 Aug 2019