• Sime Darby Property (SDPR) reported headline net loss of RM479m in 2020, mainly due to impairment of assets. Core net profit fell 67% yoy to RM164m due to lower land sales and progress billings during pandemic lockdowns.
• Despite higher revenue (+19% qoq) in 4Q20, core net profit fell 67% qoq to RM32m due to higher operating costs. We cut core EPS by 10-33% in 2021- 22E to reflect lower profit margins.
• We believe earnings forecast risk remains high for SDPR due to challenging market conditions. Maintain our HOLD call with an unchanged target price (TP) of RM0.62, based on 70% discount to RNAV.

Above Our Expectation

Core net profit of RM164m (+67% yoy) in 2020 was 17% above our forecast of RM140m but substantially higher than consensus estimate of RM7m. But the headline net loss of RM479m was higher than our forecast of RM402m due to further impairments/provisions incurred in 4Q20. There were impairments of investment properties and provisions/adjustments for previous property disposals. Revenue fell 35% yoy to RM2.06bn in 2020 as all its divisions were affected by the periodic pandemic lockdowns. EBIT margin declined to 10.5% in 2020 from 15.7% in 2019 due to lower revenue while some costs are fixed (depreciation increased 17% yoy).

Encouraging Sales

Sales fell 36% yoy to RM1.98bn in 2020 from RM3.14bn in 2019. Lower property and land sales were due to the challenging property market conditions during the pandemic. Reasonable unbilled sales of RM1.58bn at end-2020 (RM1.55bn at end- 2019) should support earnings in 2021. SDPR has set a sales target of RM2.4bn in 2021 with planned launches of about RM2.5bn with 83% of units priced at RM750k and below, mostly in its existing township developments such as KLGCC, Ara Damansara and Putra Heights.

Slower Recovery Expected

We cut our core EPS by 10-33% in 2021-22E, assuming a slower recovery in earnings as profit margins remain under pressure. We expect higher labour and building material costs while discounts are offered to spur property sales. Core 2021E PER of 17x is not attractive but supported by current Price/Book of 0.4x. We reiterate our HOLD call with an unchanged 12-month TP of RM0.62, based on 70% discount to RNAV. Key upside risk is faster-than-expected recovery in property demand. Key downside risks are further asset impairments and weaker sales.

Source: Affin Hwang Research - 26 Feb 2021