Journey to Wealth
Sime Darby - JV to develop Pagoh Education Hub
News SIME has entered into a 60:40 JV with Tunas Selatan Pagoh Sdn. Bhd. (TSP) to develop Pagoh Education Hub (PEH) in Pagoh.
Initially SIME will sell 506 acres of its vacant leasehold Pagoh land for RM50.6m or RM100,000 per acre. SIME intends to channel back proceeds of the sale into the JV and is expected to be utilised within one year.
Construction cost for PEH is RM992.6m (including supply of teaching equipment) and should span over three years. However, the proportion of SIME contribution to the cost is not disclosed. Upon completion, PEH will be leased to Malaysia Government, UTM, IIUM and UTHM for total lease of RM2.62b over 20 years.
SIME rationale for the JV is that it expects this to generate a stable stream of cash flows and contribute positively to the Group's future earnings.
Comments We are positive on the JV as this should provide stable long term cash flow from FY16E onwards.
Assuming SIME claim on the cash flow is at 60%, the Group should enjoy stable cash flow of RM79m annually from FY16E onwards. In addition, we are bullish on Johor property market due to better demand seen for its attractive pricing against Singapore property prices.
Valuation for the sale of the land at RM100,000 per acre seems fair as it is close to valuation suggested by professional valuers.
Outlook Despite our positive view on SIME participation on this JV, we expect earnings impact to kick in only from FY16E onwards. Near term earnings should be flattish in FY13E due to weaker earnings from plantation division. Note that plantation is still the largest earnings contributor to SIME with 55% EBIT contribution in FY12.
Forecast FY13E-FY14E core net profit of RM3.94b-RM4.11b remained unchanged.
However, FY13E reported net profit is increased by 0.8% to capture the one-off gain of RM32.2m from the sale of Pagoh land.
Rating Maintain MARKET PERFORM
We expect only total return of 3.8% (0.4% upside, 3.4% dividend yield) for SIME, hence we maintain our overall MARKET PERFORM call.
Valuation Sum-Of-Parts with plantation division valued at 17.5x FY13E earnings.
Risks Sustained low CPO prices at below RM3000/mt.
Source: Kenanga
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