• Upgrade to BUY from Neutral, unchanged MYR0.55 TP offers 17% upside with c.4% FY23F yield. Sime Darby Property’s 1Q23 earnings missed expectations. However, property sales remained robust at MYR688.5m, while the industrial segment was a major sales driver. As its MYR1.6bn in bookings are not yet converted into contractual sales, management’s MYR2.3bn target looks very achievable. Despite near-term political risks, we think the stock warrants a re-rating – given its improving earnings quality and bright growth outlook for its property sales.

• 1Q23 results. The sequential drop in property development revenue was due to SDPR chalking much stronger property sales in 4Q22. Sales in Bandar Bukit Raja, Elmina, Nilai Impian, Elmina Business Park and Hamilton Nilai were the major revenue contributors. While revenue for the property investment unit remained resilient despite the higher operating costs that crimped profit margins, the leisure segment booked improved numbers due to higher contributions from events and functions, F&B and golfing activities. Meanwhile, its share of loss from JVs was higher, mainly due to a MYR16.1m loss from property development (vs MYR1.4m in the same period last year), arising from higher losses from the Battersea Power Station project due to escalating operating and selling expenses. Unsold completed inventory stood at MYR274m, ie relatively unchanged from last year. Net gearing fell slightly to 0.20x, from 0.22x in 4Q22.

• Sales momentum remained robust. New property sales totalled MYR688.5m vs MYR955m in 4Q22. Note that the industrial segment has become the major contributor, accounting for 55% or MYR376m of total sales. 73% of sales achieved are from projects launched over the last 1-2 years. According to plan, a total of MYR3.05bn worth of products will be rolled out for the year and, after launching a MYR1bn GDV project in 1Q23, management is looking to launch MYR1.3bn worth of new projects in 2Q23, comprising mainly landed and high-rise residential properties.

• Forecasts. We maintain our FY23-25 earnings forecasts, as 2H is a typically stronger period while construction activities should pick up further in tandem with the easing labour shortage issue. SDPR’s unbilled sales stood at MYR3.6bn, ie unchanged from the 4Q22 level.

• Valuations. Our TP is now based on a 75% discount to RNAV, with a 2% ESG premium applied, given our ESG score of 3.10 for the company.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 26 May 2023