News  Sime Darby (SIME) announced that it is selling its freehold land located in Sungai Buloh, Selangor for

RM239.8m to Eastern & Oriental Berhad (E&O). The 135 acres land will be carved out from the current 843 acres land owned by Sime Darby Elmina Development Sdn Bhd. Currently, the land is under plantation title but SIME will procure relevant approvals to convert it to residential and commercial title.

 We gather that the price of RM239.8m includes RM192.8m cost of land and RM47.0m cost of major infrastructure. Note that SIME needs to construct these infrastructures (drains, main roads, incoming water and sewerage reticulation main, electricity and telco mains) within 36 months.

 The agreement between SIME and E&O also states that the Baseline GDV for the project is RM1.54b. If the actual GDV exceeds RM1.54b, SIME is still entitled to 20% profit sharing on any GDV above the Baseline GDV.

 The deal is expected to be completed in 1QCY19. The long time needed is due to the process to convert the title and construct the infrastructure on the land.

 Justification for the deal is because it will enhance the combined branding and value of SIME’s City of Elmina.

 Separately, Wall Street Journal (WSJ) reported that SIME has “invited banks to pitch for a mandate to advise it on an initial public offering (IPO) of its automobiles business which is likely to raise about USD500 million”. However, we understand that WSJ only mentioned that it is quoting “people familiar with the process” without name mentioned.

Comments  The land valuation works out to be RM33 per sq. ft.. We think this pricing fair as it is close to the current asking price of RM35 per sq ft for nearby lands.

 We are positive on this sale as it enables SIME to unlock the value of its landbank while keeping the option to enjoy the upside of the project should the GDV exceed RM1.54b. Additionally, SIME can still benefit through its 22% associate stake in E&O.

Outlook  We believe that the sale of the property land is targeted for value realization of their property assets. In the mid term, we expect more corporate exercise involving SIME property division and this could include Reverse Take Over (RTO), Merger & Acquisition or even REITing.

 Recall that media reports highlighted on Apr-2014 the possibility of PNB merging three of its biggest property companies. On the other hand, another speculation that was reported by the media is that SIME is looking to acquire a REIT which it will use to inject its commercial properties.

 Regardless of the eventual method of which SIME will use to realize the hidden value in the property division, we believe that SIME is now in the stage of unlocking the hidden value for most of its non-plantation divisions which we believe have caused its valuation to stay low against its peers.

 In the past 3 months, SIME has proposed in total 4 deals with all of them related to sale or reducing stake in non-plantation division. (Refer below for details of these deals) If the market talk of the motor division IPO is materialised, this will then be the 5th such deal.

 We are positive on this direction as this should allow SIME to emerge from the current value trap of being a conglomerate which usually commands lower PE valuation (against pure plantation companies).

Forecast  We maintain FY14E Core Net Profit (CNP) of RM3.06b. We also maintained our FY15E CNP of RM3.68b. We believe that the near term earnings impact is limited as the land sale deal should only be completed in 1QCY19.

Rating Upgrade to OUTPERFORM

 We think investors should now position ahead of SIME’s higher revaluation due to the sale or stake reduction in property division and other non-plantation divisions.

Valuation  Increase our TP to RM10.50 based on Sum-Of-Parts which has been rolled over to apply respective division PE valuation to CY15E earnings (from FY15E earnings previously).

Risks to Our Call Lower-than-expected CPO prices.

 Lower-than-expected earnings from non-plantation division.

Source: Kenanga