Sime Darby’s award of a MYR82.97m construction contract to Zecon and en-bloc sale of an office tower at its Oasis Square development for MYR124.5m is part of its ordinary course of property development business. Pricing for the disposal is fair in our opinion. We maintain our BUY recommendation with SOP-based fair value of MYR10.40. Sime continues to trade at a 2-3x discount to its large-cap peers, which we believe is unjustified, given Sime’s large-cap market weighting and relatively stable earnings profile, compared to its peers, who are heavily reliant on plantation earnings and CPO price movements.  

♦  Sime Darby made two announcements:   1)  It awarded a MYR82.97m contract to Zecon Berhad to construct a ten-storey commercial building in Taman Melawati, Setapak; and  2)  It entered into a Sale & Purchase (S&P) agreement with Brunsfield Oasis Tower S.B. for the sale of one block of 12 storey commercial office building in Ara Damansara known as Block H, Oasis Square for MYR124.5m.

♦  The construction contract is part of its normal course of its property development business, and was done on a tender basis, with a timeline to completion of 28 months. Zecon was the lowest bid, and is expected to start construction this month.

 
♦  We are positive on the en-bloc sale of Oasis Square office tower, as it was done at a reasonable transaction price of MYR650/sq ft for the 191,399 sq ft of net saleable area. The disposal price was based on an independent valuation of MYR115m. Although other office towers in Petaling Jaya like Kencana Square have been priced at around RM700/sq ft, we note that the Kencana Square building is in a more prime area facing the Federal Highway.

♦  The sale of the office tower is also part of Sime’s normal course of its property development business, and would form part of the MYR1.9bn in revenue we have projected for Sime to achieve from its property division in FY06/13.  Sime will recognise a gain of MYR10.86m from this disposal. As this is a non-recurring item, we would not be imputing this into our forecasts.

Source: RHB