Sime Darby Berhad (SIME) announced the disposal of its 40% stake in Seriemas Development (Seriemas) to PNB Development for a cash consideration of RM625m. We are neutral on this one-off transaction, while valuation at 1.5x historical PBV appears fair against similar developers. No change to FY17-18E CNP of RM2.33-2.29b, while FY18E NP increased by 12% to RM2.72b. Maintain MARKET PERFORM call and TP of RM9.50 based on Sum-of-Parts.

Disposing 40% stake in Seriemas. SIME announced that its wholly owned subsidiary Sime Darby Property Berhad (Sime Property) has entered into a Share Sale Agreement with PNB Development Sdn. Bhd (PNBD), a wholly owned subsidiary of its major shareholder PNB, to dispose its entire 40% equity interest in Seriemas Development Sdn Bhd (Seriemas) comprising 1.0m shares for a total cash consideration of RM625.0m. Note that PNBD holds the remaining 60% stake in Seriemas. While total landbank was not disclosed, we understand that key developments include Kota Seriemas in Nilai, Negeri Sembilan, and hotels in Morib, Selangor. We gather that the sale is targeted for completion within 3 months or 2Q18. Note that this is the fourth property transaction with PNB or its subsidiaries since Jul-16, bringing the total value of the transactions to RM1.25b.

Neutral impact. We are neutral on the sale as we gather that the move is a part of SIME’s long-term strategy to divest non-strategic assets. In terms of valuation, we gather that the deal values Seriemas at RM1.56b, which implies a historical PBV of 1.52x and historical PER of 20.0x. We believe this is fair as it is in line with comparable developers’ current PBV of 1.47x and PER of 20.3x. SIME noted that the market value of the land was appraised at RM2.79b and thus the 40% equity interest by Sime Property was valued at RM1.23b. After excluding a cash dividend of RM120m received on Jun-17 from Seriemas, this implies a RNAV discount of 39.4%. This is in line with our Property segment valuation of a 40% RNAV discount, but priced at a premium to the property segment average discount of 52%. Given the one-off nature of the deal, we expect minimal change to our CNP estimates. We believe the lower associate profit of c.RM20-30m per year would be partly offset by potentially lower interest charge of c.RM15m, assuming the proceeds are used to pare down borrowings. FY18E net gearing impact is relatively negligible, with a small reduction to 0.27x (from 0.28x) as the proceeds represent only 3% of FY18E borrowings.

Maintain FY17-18E CNP at RM2.33-2.29b as the net impact makes up <1% of bottomline. However, we increase FY17-18E CNP by 0-12% to RM2.80-2.72b to reflect one-off gains on the sale.

Better 4Q17 for Property segment. With further earnings recognition from the Battersea Phase 1 project between 4Q17-1Q18, we expect to see robust contribution from Sime Property in its upcoming result, due end-August. Meanwhile, the local Property outlook is stablising, but unexciting in the mid-term, with muted expectations on the upcoming Budget 2018. As for other segments, we expect the Plantation division to report good YoY and QoQ earnings growth on better CPO production and relatively high CPO prices. Meanwhile, the Motors outlook is slightly positive on new model releases, but the Industrials outlook could remain lukewarm due to ongoing business reviews.

Reiterate MARKET PERFORM with an unchanged TP of RM9.50 based on Sum-of-Parts. Our Plantation PER valuation is maintained at 26.0x implying a 5% premium to average big-cap PER of 25.0x. As we believe the market has already fully priced in the proposed listing structure of the Plantation and Property divisions based on our SoP valuations, we maintain our MARKET PERFORM view on the stock.

Source: Kenanga Research - 2 Aug 2017