• Maintain BUY, TP rises to MYR2.33 from MYR2.20, 55% upside with c.2% FY24F yield. We are upbeat on Google’s second investment for a data centre (DC) in Elmina Business Park (EBP), which is larger in value and capacity than the first one. Sime Darby Property’s earnings growth profile will change from 2026-2027 onwards, and the journey ahead could be exciting – as we expect a DC fund to potentially be set up, and listing of a REIT to be in the pipeline. We also do not rule out the possibility that SDPR may acquire some industrial properties to grow the size of its asset portfolio faster.

• Google DC Phase 2. SDPR announced the signing of a new build-and-lease agreement with Pearl Computing Malaysia (ie Google) for another DC facility to be developed on a 77-acre site in EBP. The second facility is near to the first Google DC, which is currently under construction and targeted for completion in early 2026. Upon the completion of the second Google DC in FY27, a 20-year lease valued at up to MYR5.6bn will commence, and the lease comes with an option for renewal for two additional 5-year terms.

• Solid execution by management. The second Google DC came in just six months after the first one was announced. We estimate that the investment by Google for Phase 2 could worth MYR4-5bn, as the capacity could be around 200-250MW, based on the land size and the value of total rental. Together with the MYR1.5-2bn investment for Phase 1 (of about 100MW), Google is investing a total of MYR5.5-7bn in EBP alone. This is a boost of confidence for the growth prospects of EBP, and should entice more manufacturers to set up their production facilities in the area. Already, EBP is seeing significant interest from many ancillary industries along the DC supply chain (eg cooling tower manufacturing). We expect EBP and the Elmina township to continue to be a major property sales contributor (now accounting for 25-30% of annual property sales) in the coming years.

• Ramping up recurring income stream. Putting the step-up rental aside, based on a simple average calculation, both Phases 1 and 2 could generate MYR380m in rental income per year, and contribute around MYR170-180m to total net profit. This is slightly more than 30% of our earnings forecast for FY24, suggesting that SDPR’s earnings from FY27 onwards may undergo a quantum leap when both DCs contribute at the same time.

• Balance sheet is healthy enough to fund more capex. Although management has yet to provide details on its funding plan, we think SDPR’s balance sheet will be able to fund the capex for the facility. The additional borrowings (assuming 70% debt) should raise the company’s net gearing to around 0.4- 0.5x, from 0.195x currently. We believe that the market should be receptive to this, considering the quality of the tenant and asset – which has an almost- zero off-taker risk and 7-8% expected yield.

Source: RHB Securities Research - 3 Dec 2024