News    Sime Darby (“SIME”) announced that it had awarded a contract to Zecon Berhad (“ZECON”) to construct the Melawati Corporate Centre (“MCC”) in Taman Melawati, Gombak for a total contract sum of RM83m.

Note that MCC will be a 10-storey commercial building consisting of six units of retail shops on one level and 104 units of offices on another nine levels. The project should take 28 months to complete.

We gather that ZECON is the lowest tenderer among the five tender bids submitted. In addition, damages of RM36.7k per day will be imposed on ZECON in the event of any delays.

Comments    We reckon that the award to ZECON looks fair as its tender submitted was the lowest. In addition, SIME is protected in the event of any delays due to the existence of the penalty clause of RM36.7k per day.

In our view, SIME will likely rent out the offices once it is completed in mid-2015 and this should bode well for SIME’s property division earnings in FY16. 

We are positive on the deal as increased sustainable earnings from the property division should reduce SIME’s dependency on its plantation division, which is exposed to CPO price volatilities.

In addition, there is great synergy to be realised in Taman Melawati as SIME-CapitalMall Asia JV should complete a mega shopping mall in 2016 in the surrounding area with a total net lettable area of 635,000 sf.

However, the impact to its F16E earnings should be minimal as the overall property division contributed only 7% to SIME Group’s EBIT in FY12.

Outlook   Despite our positive view on the deal, the company’s upcoming 3QFY13 result should be challenging in view of the current low CPO prices at an average of RM2324/mt (or a decline of 28% YoY). This should limit SIME’s share price upside.

Forecast   There is no change to our FY13E-FY14E core net profits of RM3.05b-RM3.55b as we only expect the deal to contribute positively from FY16E onwards.

Rating   Maintain MARKET PERFORM

Valuation    Maintaining our Target Price of RM9.80 based on the Sum-Of-Parts valuation model (Refer Page 2).

Risks   Lower than expected CPO prices.

Source: AmeSecurities