SIMEPROP has acquired a 760ac land for RM280m in Labu Negeri Sembilan earmarked for an industrial development. We view the purchase as a bargain given the price of RM8.46 psf which is lower compared to historical transactions done by other listed companies within the vicinity. Moreover, the land cost/tentative GDV is also low at 7.3%. Overall, we are mildly positive of the deal. Maintain MP on a higher TP of RM0.735 (from RM0.605) pegged to a higher FY22E PBV of 0.53x as we see better earnings visibility for the group.

Bought 760ac of land for RM280m (or RM8.46 psf). SIMEPROP has bought 760 acres of land in Labu, Negeri Sembilan from SIME for RM280m (or RM8.46 psf). For context, these 760ac lands acquired are part of a bigger plot (totaling 8,796ac) in which SIME has provided SIMEPROP the call options* to acquire when SIME underwent a demerger exercise to split SIME, SIMEPLT and SIMEPROP back in 2017. The land acquisition came about because a third party made an offer, triggering SIMEPROP to exercise their right of first refusal to acquire it.

*The call options will expire in Nov 2022 but extendable for another 3 years if mutually agreeable by both SIME and SIMEPROP.

Industrial development on the cards. SIMEPROP has indicated that the plot of lands would be earmarked for industrial developments. However, given the nature of the transaction (i.e. through right of first refusal), the timing for such development has not been firmed up. Currently, the land is planted with oil palm and operated by SIMEPLT. Note that this plot of land is adjacent to the Nilai-Enstek Road project which will be completed in 2023 and also in close proximity to other industrial parks i.e. TechPark@Enstek developed by Tabung Haji, and Sendayan Tech Valley developed by Matrix Group (refer map overleaf).

Price is a bargain given the potential. Based on historical land transactions within the vicinity by: (i) Ajinomoto (at RM42 psf in 2018) and (ii) Matrix (at RM10 psf in 2014) (tabled overleaf), we note that the RM8.46 psf price is at a bargain. Also, should the land be developed into an industrial park, assuming a GDV/acre of RM5m, the entire plot could fetch a GDV of c.RM3.8b – suggesting a low land cost/GDV ratio of 7.3%. Post-acquisition, net gearing will remain healthy at 0.33x (from 0.30x as of 2QFY21). Overall, we are mildly positive on the acquisition.

Keep FY21-22E earnings forecast unchanged.

Maintain MARKET PERFORM and higher TP of RM0.735 (from RM0.605) based on higher FY22E PBV of 0.53x pegged to 0.5SD below 5-year mean (from 0.44x PBV pegged to -1.0SD). Our upgrade in valuations is premised on SIMEPROP’s better earnings visibility versus peers as its vast land banks (at low rates) in matured townships allow them to focus on landed/industrial products and therefore be less affected by the high-rise oversupply issue.

Risks include: (i) weaker/stronger-than-expected property sales, (ii) weaker margins, (iii) changes in real estate policies, and (iv) changes in lending environment.

Source: Kenanga Research - 28 Oct 2021