SIMEPLNT is selling land valued at RM618m to SIMEPROP. The parties have eight more such options expiring this 30 November, so more sales is possible. This disposal is marginally EPS accretive and will lower SIMEPLNT’s gearing. A RM600m gain is also likely in FY22 but will exert no impact on core EPS (CEPS) as the transaction will probably be concluded late in 2022. FY23F CEPS has been nudged up marginally on lower net interest cost. Maintain our MARKET PERFORM and TP of RM4.40.

In conjunction with the de-merger of Sime Darby into three separately listed entities (SIME, SIMEPLNT and SIMEPROP), nine put and calls over parcels of land were signed between SIMEPLNT and SIMEPROP in 2017. The options are valid for a period of five years effective 30 Nov 2017. On 29 Aug 2022, SIMEPROP exercised one of the call options to acquire 949 acres (384 Ha) for RM618m from SIMEPLNT. Located in Kapar, Selangor, the price of RM651k/acre or RM15 psf is fair. As a comparison, land transactions over the past five years around the vicinity ranged between RM12-88 psf with a median price of RM28 psf. Whilst it might appear that SIMEPLNT is selling at the lower end of the price range, we have to be mindful that this is for a sizeable piece of unconverted, agriculture land. Moreover, the price of RM618m is also based on valuation conducted by Jones Lang Wootton. The next step will be for the parties to conclude a sales and purchase agreement which we think should be sorted by the end of 2022.

The main impact on SIMEPLNT is paring down its debts. Despite strong CPO prices, SIMEPLNT’s net gearing had been stickier than we anticipated. As an example, for 1HFY22, despite strong CPO prices the group’s net gearing remained at 52-53% due to dividend payments and high working capital. As such, this divestment should help SIMEPLNT pare down its net debt of RM8,526m or net gearing of 52% (RM6,295m or 39% net gearing without perpetual sukuk) down to RM7,908m with 49% in net gearing (RM5,677m or 35% net gearing if without perpetual sukuk). The prospective sale should also be neutral-to-accretive on earnings depending on CPO prices. All in all, we like the disposal as it will trim gearing (hence associated risk) while concurrently strengthen earnings, albeit very marginally if any. It might also lead to higher dividends but for the moment we are keeping FY22F NDPS at 26.0 sen. If more of such divestment were to follow, revision to our NDPS is more likely.

Forecasts. We are keeping SIMEPLNT’s FY22F CEPS as we expect the prospective sale to conclude only towards the end of the year. We are nudging up FY23F CEPS by 1% as interest saving should offset the loss of palm oil income derived from the land being sold. However, FY22F PATMI should see a disposal gain of around RM600m as SIMEPLNT’s estates in Selangor have a carrying value of only RM36K per hectare.

Maintain MARKET PERFORM and RM4.40 TP. Labour shortages, rising field costs are our chief concerns for SIMEPLNT moving ahead. That said, this transaction just shows how valuable some of the lands belonging to old plantation groups such as SIMEPLNT are. As such, we like SIMEPLNT for its defensive land-rich NTA, decent and now set-to improve gearing with healthy margins still expected as CPO prices should stay firm going into FY23. As indicated, a larger-than-expected dividend payout cannot be ruled out either for FY22 but we are not factoring that in for the moment.

However, above average operating costs, weak ROEs and ESG concerns raised by the US Customs and Border Protection agency on “forced labour” are preventing a target PER above peers’ of 15x or a stronger recommendation. Hence, our TP of RM4.40 is derived from 15x FY23 CEPS with no ESG premium in view of the group’s average 3-star scoring

Source: Kenanga Research - 1 Sept 2022