SIMEPROP’s 1HFY23 results met our expectations but disappointed the market. Its 1HFY23 net profit grew 17% YoY driven by sales of industrial and residential products, partially offset by losses from 40%-owned Battersea Power Station. We maintain our forecasts, but raise our TP by 20% to RM0.66 (from RM0.55). Maintain MARKET PERFORM.

Within expectations. SIMEPROP’s 1HFY23 core net profit of RM131.7m came in within expectations at 47% of our full-year forecast but only 43% of the full-year consensus estimate.

YoY, its 1HFY23 revenue surged 25%, primarily driven by higher property development contributions from their stronger sales and combination of industrial and residential products. Notably, gross margins fell to 27.1% (-4.0ppts) as materials costs likely caused some pressure. Meanwhile, the group’s 40%-owned Battersea Power Station continued to fall into deep losses (-520%) no thanks to aggressive interest rate hikes in the UK as well as the softening of property demand there. Overall, stripping out RM53m disposal gain registered in 1HFY22, SIMEPROP’s 1HFY23 core net profit of RM131.7m would translate to a 27% growth.

Briefing highlights. SIMEPROP revised their GDV to RM4.0b (from RM3.0b) in anticipation of better traction on the local front.

1. As at 1HFY23, the group registered their unbilled sales at RM3.8b (+6% vs 31 Dec 2022: RM 3.6b) and 34% of the unbilled sales will be recognized in FY23. The remaining 66% is expected to be recognized in the next three financial years. Going forward, SIMEPROP looks to add more industrial products into their mix which had made up mostly of residential (previously c.70% of portfolio) projects, landed or high-rise. This could benefit the group by pivoting into a direct beneficiary of economic activity and minimize exposure to potential oversupply in housing markets.

2. The group had announced its venture into rooftop solutions for solar energy production to diversify its revenue streams by 2025 while aligning with the Government’s vision to achieve 70% renewable energy capacity by 2050. SIMEPROP is collaborating with the government on a rooftop solar project for the upcoming City of Elmina and intend to explore potentials with 1,000 residential units in 2HFY23 and might expand to 10,000 homes in the next five years.

3. Battersea will likely be in the red, no thanks to higher overall business expenses fuelled by the severely tightened monetary policies there. That said, the group believes that cost pressures may ease over time, particularly with more commercial leases being signed there and new apartment launches demonstrating an encouraging take-ups.

Forecasts. Maintained.

However, we raise our TP by 20% to RM0.66 (from RM0.55) as we reduce our discount to RNAV to 60% from 65% to reflect the improved sentiment towards property stocks of late. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

We like SIMEPROP for: (i) its diversified portfolio in both landed residential and industrial products which limits dependency on residential high-rise products unlike certain peers which are in a state of oversupply, (ii) strong foothold in matured townships, (iii) proactive initiatives to boost recurring income via strategic investments, and (iv) its solar initiatives. However, we are concerned over the persistent losses from the Battersea Power Station project. Maintain MARKET PERFORM.

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 - 29 Aug 2023