SIME has sold a 760ac land for RM280m in Labu, Negeri Sembilan to SIMEPROP, which is earmarked for an industrial development. Based on disposal value of RM280m, the disposal is priced at P/Book of 1.3x. SIME is expected to record a gain on disposal of RM55m, or c.1.0 sen/share which is expected to be distributed as special dividend. With earnings impact of below 1% at the group level, we welcome the disposal of this non-core asset at fair value. Maintain OP with unchanged TP of RM2.60.

Sold 760ac of land for RM280m (or RM8.46 psf). SIME has sold 760 acres of land in Labu, Negeri Sembilan to SIMEPROP for RM280m (or RM8.46 psf). For context, these 760ac lands sold form a part of a bigger plot (totalling 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 was 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).

Non-core asset disposal at a fair price. 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 at RM8.46 psf price, while looks a shade on the low side, is considered fair given the large acreage that is not yet converted, besides being a opportunity to dispose of a non-core asset.

Impact to financials. The net book value of the land as of 30th June 2021 was RM217.7m. Based on disposal value of RM280m, the disposal price works out to be at P/Book of 1.3x. SIME is expected to record a gain on disposal of RM55m, or c.1.0 sen/share which is expected to be distributed as special dividend. With earnings impact of below 1% at the group level, we welcome the disposal at fair value, of this non-core asset.

Outlook. Management noted that most of the group’s operations are in countries/territories that are not subjected to significant movement restrictions and the recovery in motor vehicle sales has generally been strong. Motor vehicles sales continued to be on strong recovery path despite minor setback in global supply chain that could limit sales as there may not be sufficient inventories for sale for certain new models which had been the case for the drop-in units assembled (-28% YoY). Increased infrastructure spending from fiscal stimulus measures by various countries would support equipment sales for the Industrial division.

Maintain OP with SoP-derived TP of 2.60 which implied PER of 12.3x on FY22E EPS. The stock offers dividend yield of 4.8%.

Risks to our call include: (i) lower-than-expected car sales volume, and (ii) lower-than-expected industrials contribution.

Source: Kenanga Research - 28 Oct 2021