Sime Darby Property (SDPR) reported 3Q19 result that was above market and our expectations. Net profit jumped 3.5-fold yoy to RM496m in 9M19, driven by higher property development earnings, land and investment property sale gains. But net profit plunged 88% qoq to RM25m in 3Q19 due to impairment and provisions recognised. We lift core EPS by 8% in 2019E to reflect higher sales but cut 2021E core EPS by 16%, assuming easing sales momentum. Given the earnings volatility, we raise our discount to RNAV to 60% from 50% and reduce our TP to RM0.83 from RM1.05. Downgrade to HOLD from Buy.

One-off Gains and Impairments

Net profit of RM496m (+355% yoy) in 9M19 comprises 92-97% market consensus and our previous full-year forecasts of RM510-539m. Sales of RM2.25bn in 9M19 exceeded our previous forecast of RM2bn in 2019E. Core net profit increased more than 9-fold yoy to RM283m, driven by higher progress billings on ongoing projects, sale of inventories and new property launch sales. SDPR generated one-off gains of RM108m from non-strategic land sales and RM209m from disposal of investment properties in 9M19. But this was offset by impairment and provisions totalling RM128m.

Higher Revenue

Revenue jumped 38% yoy to RM2.29bn in 9M19, driven by higher property sales, progress billings on ongoing projects and non-core land sales of RM89m. EBIT increased 3-fold yoy to RM269m with land sale gains boosting EBIT margin to 13.7% in 9M19 from 6.2% in 9M18.

Close to Achieving Sales Target

SDPR launched new properties with gross development value (GDV) of RM1.39bn in 9M19 with planned launches of RM0.83bn in 4Q19. SDPR is on track to meet its target new launches of RM2.0-2.5bn in 2019. It achieved RM2.25bn sales in 9M19 and could exceed its target sales of RM2.3bn in 2019. Unbilled sales of RM1.56bn and total unsold and launched units worth RM1.84bn will support sales and earnings in 2019-2021E.

Downgrade to HOLD

We downgrade our call on SDPR to HOLD from Buy with lower TP of RM0.83, based on 60% discount to RNAV (50% discount previously). We are concerned with the volatility in earnings and EBIT margins. Key upside risk are sustained strong property sales and further land sale gains.

Source: Affin Hwang Research - 28 Nov 2019