• Disposing 40% stake in Seriemas Development

• Valuation of RM625m is based on 39% discount to RNAV

• Positive on the news

• Increase FY18 estimate but core earnings maintained

• Maintain NEUTRAL with TP of RM9.00

Disposing 40% stake in Seriemas Development. Sime Darby Berhad (SIME) is disposing its 40% stake in Seriemas Development Sdn. Bhd. (SDSB) to PNB Development Sdn. Bhd. (PDSB) for RM625m cash. Note that PDSB currently has a 60% stake in SDSB. Expected gain on disposal is RM305m and the completion date is by end 2017.

Valuation of RM625m is based on 39% discount to RNAV. We gather that the market value of SDSB land and investment properties is at RM2.79b. Hence, the 40% stake is worth RM1.23b based on Realisable Net Asset Value (RNAV). However, the deal is proposed to be at 39% discount to RNAV as it is in line with the range of RNAV discount of 26% to 46% for deals involving Malaysian property development companies.

Positive on the news. We are positive on the news due to the one off gain of RM305m. We also expect its net gearing to decline slightly to 0.28x (from 0.30x as of end-March 2017).

Increase FY18 estimate but core earnings maintained. We raised our FY18 earnings estimate by 13% to RM2.69b to reflect the disposal gain of RM305m. However, its FY18 core earnings is unchanged at RM2.33b. No impact on FY17 earnings as it has ended in June 2017.

Maintain NEUTRAL with unchanged TP of RM9.00. Our Target Price is based on Sum Of Parts (SOP) valuation. While SIME valuation at 27.5x PE appears to be high, its share price is supported by decent dividend yield of 3.3% and the expectation of value creation from the demerger corporate exercise.

Source: MIDF Research - 2 Aug 2017