Kenanga Research & Investment

Sime Darby Property - Maximising Margins

Publish date: Thu, 02 Mar 2023, 10:25 AM

SIMEPROP guided for a low sales target of RM2.3b for FY23. Its unbilled sales level is comfortable, thanks to record sales of RM3.7b in FY22. Coupled with a healthy balance sheet, it has the flexibility to only launch products that meet its margin threshold. We maintain our forecasts, TP of RM0.55 and OUTPERFORM call.

The key takeaways from SIMEPROP’s post-4QFY22 results briefing are as follows:

  1. In line with its previous guidance, SIMEPROP has set a lower sales target of RM2.3b in FY23 (our projection is RM2.8b). It shared that it remains flexible with its RM3.0b launch plans depending on the market situation. Its priority is to maximise margins and will only launch projects that meets a minimum margin threshold. As of end-2022, its unbilled sales stood at record high of RM3.6b.
  2. It guided for lower gross profit margins of 20%-25% for FY23 and FY24 (versus 30% achieved in FY22) as lower-margin contracts awarded in FY21 and FY22 would see a ramp-up in works this financial year. These contracts have lower margins due to the spike in building material costs coupled with labour shortage experienced back then.
  3. While the labour shortage situation has eased, it still requires another c.2,000 workers to execute its ongoing jobs smoothly. It expects to achieve sufficient labour count by 2HFY23 as workers are gradually flowing in.
  4. Sitting comfortably on a healthy balance sheet (with net gearing of 0.22x), it will monetise its 2,130 non-core land banks worth c.RM1b -RM3b only upon receiving attractive offers. Separately, it intends to activate more land banks within its matured townships. However, it does not plan to undertake any land banking activities in the near future.
  5. Meanwhile, its 40%-owned JV Battersea is showing signs of improvement. During the quarter, Battersea made its maiden repatriation of profits to its shareholders (SIMEPROP’s stake was RM366m). Its recent launch i.e. Koa which comprises 204 units, has seen a healthy take-up of c.50% since Oct 2022. Moving forward, it is planning for Battersea Phase 3C, a mixed development project comprising three buildings. It shared that Battersea is exploring options to form joint-venture with other international players at the development level to implement future phases.

We maintain our earnings forecasts and TP of RM0.55 based on an unchanged 65% discount to RNAV – in line with peers’ discount range of 60%-65%. There is no adjustment to TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We continue to like SIMEPROP for: (i) its wide products range enabling it to cash in on landed residential and industrial products while the high-rise segment is weighed down by oversupply, (ii) its mature township projects that provide recurring sales, and (iii) its seemingly effective digital marketing through social media platforms, in addition to the conventional sales channels. Maintain OUTPERFORM.

Risks to our call include: (i) a prolonged downturn in the local property market, (ii) rising mortgage rates further hurting affordability, (iii) rising construction cost, and (iv) risks associated with overseas operations.

Source: Kenanga Research - 2 Mar 2023

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