Sime Darby Property’s (SDPR) 1Q20 result was a negative surprise. It reported net profit of RM14m in 1Q20, down 95% yoy from RM265m in 1Q19. There were net exceptional losses of RM5.7m recognised and higher financing costs in 1Q20. We cut our core EPS by 54% in 2020E assuming slower progress billings and EBIT margins. But we raise our core EPS by 10-24% in 2021-22E on an acceleration in progress billings to meet property delivery schedules. Earnings volatility remains our key concern for SDPR. Hence, we downgrade our call to SELL with a slightly higher 12-month TP of RM0.60, based on a 70% discount to RNAV.

Negative Surprise

Net profit of RM14m (-95% yoy) in 1Q20 was only 3% of the consensus fullyear forecast of RM458m and 6% of our ingoing estimate of RM225m. We were surprised by the low revenue and EBIT margin. Its property development and investment operations were adversely affected by the closure of show galleries, mall and construction sites due to the government’s Movement Control Order (MCO). Net exceptional losses of RM5.7m were mainly due to provisions for outstanding obligations on property disposed. There was a oneoff investment property disposal gain of RM204m in 1Q19.

Weak Operating Performance

Revenue fell 17% yoy to RM477m in 1Q20 on lower property sales and slow progress billings for ongoing projects. Core net profit plunged by 67% yoy and 82% yoy to RM20m in 1Q20. Higher financing costs (+86% yoy), RM11m share of joint-venture losses and a higher effective tax rate also had a knock on effect on the bottom line. Sales of RM345m in 1Q20 were lower than the RM403m achieved in 1Q19. SDPR launched new properties with 583 units in 1Q20 with a gross development value (GDV) of RM497m. Take-up rates of 64-78% were encouraging. Unbilled sales of RM1.47bn should support sales and earnings in 2020-2021E. SDPR still has total unsold units with a GDV of RM2.8bn (27% are completed units).

Downgrading to SELL

We raise our RNAV/share estimate to RM2.02 from RM1.96 previously after rolling forward the base year of our DCF for its property development segment to 2021E. Applying the same 70% discount to RNAV, we fine-tune up our 12- month TP to RM0.60 from RM0.59. However, given the 12% downside potential to our TP, we downgrade our rating to SELL from Hold. Key upside risks are stronger-than-expected property sales and potential land-sale gains.

Source: Affin Hwang Research - 22 May 2020