• BUY, new MYR1.54 TP from MYR1.42, 33% upside with c.2% FY24F yield. Sime Darby Property will be the first developer in Malaysia to own a hyperscale data centre (DC), and rental income from this facility should add to its pool of recurring income over the long term. The deal is likely to lift the profile and land prices at its Elmina Business Park. We also do not rule out the possibility that more DCs will be established in City of Elmina (Elmina) or SDPR’s other industrial parks. Our TP is based on a 35% discount to RNAV (vs 40% previously) to reflect the faster turnaround of its industrial land.

• Welcoming the first DC. Yesterday, SDPR announced that it has entered into an agreement with Pearl Computing Malaysia (a wholly-owned subsidiary of Raiden APAC), whereby the former will build and lease a hyperscale DC on a 49-acre site at Elmina Business Park to the latter. Raiden APAC was incorporated in Singapore, and is a part of a multinational technology corporation headquartered in the US, while Pearl Computing Malaysia is primarily involved in providing infrastructure for hosting, data processing services, and other IT service activities. The DC will be leased for 20 years upon completion, with the renewal option of a further 5+5 years. The total rent payable to SDPR over the first 20 years is estimated at MYR2bn.

• Potential 8% yield from this DC. SDPR will likely tender out the construction contract for this DC, and also needs to provide the necessary infrastructure including fibre network and perhaps also additional power supply to the site. The cost of land for SDPR should be cheap, but upfront costs to invest in this DC will be sizeable. In our view, SDPR’s balance sheet is sturdy enough to enable it to undertake the financial commitment, since its net gearing is only at 0.24x presently. Based on our discussions with some industry players, the expected rental yield from a DC may be around 8%, which means annual rental revenue for SDPR may amount to MYR8m.

• Reaping benefits of its strategic exposure to the industrial segment. We do not discount the possibility that more DCs may be built in other industrial parks currently developed by SDPR, including in Bandar Bukit Raja, Serenia Industrial Park, Hamilton Nilai City and Bandar Universiti Pagoh. The industrial segment currently accounts for 30% of total property sales. Given its strategic exposure, SDPR is well-positioned to ride on the wave of DCs being set up in Malaysia. To fund a portfolio of DC facilities in the future, we think management may replicate the Industrial Development Fund model used for its JV project with LOGOS in Bandar Bukit Raja.

• We maintain our earnings forecasts, as the estimated rental income is considered minimal and should only begin from FY26 onwards, the earliest. Our TP has a 4% ESG premium built in as per in-house proprietary methodology, as SDPR’s ESG score is two notches above the country median.

Source: RHB Research - 24 May 2024