• Sime Darby Property’s (SDPR) 2Q20 results were disappointing. It reported net loss of RM82m in 2Q20 and RM68m in 6M20, mainly due to inventories writedown and property development expenditure (PDE) write-off.
• Core net profit fell 85% yoy to RM37m in 6M20 with weaker property sales and losses incurred by its retail mall, leisure and hospitality businesses.
• We cut our net profit to RM0.9m in 2020E to reflect the one-off losses but our core earnings forecasts are largely intact. We reiterate our SELL call with a RM0.62 target price (TP), based on 70% discount to RNAV.

Surprise Loss

We were surprised by the net loss of RM68m in 6M20 vs net profit of RM470m in 6M19. Consensus full-year net profit forecast is RM257m and our previous estimate was RM105m. The losses were mainly due to inventories write-down and PDE writeoff amounting to RM85.3m. There was land sale gains of RM209m in RM6M19). Core net profit plunged 85% yoy to RM37m in 6M20, mainly due to slow property progress billings and loss-making investment properties (retail mall and golf club operations) during the Movement Control Order (MCO) period. Pre-operating expenses were also incurred for its new KL East Mall in Taman Melawati.

Focus on Reducing Inventories

SDPR will continue to focus on reducing its inventories with gross development value (GDV) of RM2.4bn as at end-June. Property sales was RM713m in 6M20 with average take-up rate of 84% for across all its ongoing projects. Unbilled sales of RM1.55bn will support earnings with about 90% of the total to be recognised in 2021. Net gearing is at a reasonable level at 0.23x as at end-June. Prospects remain challenging due to weak property market sentiment and tights bank lending policies. But should see better 2H20 results as sales and progress billings pick up.

Earnings Risk Remains High

We factor in net exceptional losses of RM105m incurred in 6M20 into our new net profit forecast of RM1m. Our core earnings forecasts are unchanged. 2021E core PER of 23.4x is not attractive but Price/book of 0.5x is reasonable. Maintain our SELL call with TP of RM0.62, based on 70% discount to RNAV. Key upside risks are higher-than-expected property sales and stronger-than-expected turnaround of its property investment operations.

Source: Affin Hwang Research - 27 Aug 2020