• Similar to SP Setia, Sime Darby Property (SDPR) also recognised RM337m impairment for its 40% stake in Battersea Power Station project in 3Q20.
• The net loss of RM355m in 3Q20 increased its cumulative net loss to RM423m in 9M20. Excluding the impairment charge, we estimate core net profit was RM132m (-78% yoy) in 9M20.
• We believe earnings forecast risk remains high for SDPR due to challenging market conditions. Maintain our HOLD call with target price (TP) of RM0.62, based on 70% discount to RNAV.

Surprise Larger Loss in 3Q20

We were surprised by the larger net loss of RM355m incurred in 3Q20 compared to net loss of RM82m in 2Q20 as SDPR continues its kitchen-sinking exercise. The impairment of SP Setia’s 40% stake in the Battersea project reported last week gave hints of a potential impairment of SDPR’s 40% shareholding as well in the UK project. Estimated core net profit of RM132m for 9M20 exceeded our previous forecast of RM106m for 2020 but seems in line with market consensus estimate of RM163m. We were surprised by the positive minority interests in 9M20.

Slow Progress Billings

Revenue fell 41% yoy to RM1.36bn due to disruptions caused by the Covid-19 pandemic and the movement restrictions imposed by the government. Gross profit plunged 77% yoy to RM136m in 9M20 as operating expenses did not fall in tandem with revenue. EBITDA margin shrunk to 13.2% in 9M20 compared to 27.5% in 9M19.The impairment of inventories and its associate stake pushed SDPR into the red with net loss of RM422m in 9M20, compared to net profit of RM496m in 9M19. The disposal gains of its Singapore investment properties and land sales boosted its earnings in 9M19, which did not recur in 9M20.

Encouraging Sales

SDPR achieved encouraging property sales of RM1.27bn in 9M20, mainly from its projects in the Klang Valley (82% of total sales). The sales replenished its unbilled sales to RM1.53bn to support revenue recognition over the next 2 years. We lift core EPS by 33% in 2020E and 3% in 2021-22E to reflect the positive minority interests. Current 2021E PER of 19x is demanding despite the current low Price/book of 0.4x. We reiterate our HOLD call with TP of RM0.62, based on 70% discount to RNAV. Key upside/down risks are strong/weak property sales and progress billings.

Source: Affin Hwang Research - 26 Nov 2020