Review

• Sime Darby Property (SDP) reported a core net profit of RM125.8mn in 1H23. Results came in below expectations, accounting for 38% and 40% of ours and consensus’ full-year forecasts, respectively. The negative variance was primarily attributable to lower-than-expected revenue from property development segment and a higher-than-expected share of JV losses.

• A first interim single tier dividend of 1sen/share was announced, matching the amount declared last year.

• SDP reported a YoY revenue increase of 25% to RM1.4bn in 1H23, along with a 16% increase in core net profit from RM108.4mn in the same period last year to RM125.8mn. The property development segment PBT grew 6% YoY, fueled by higher sales of industrial and residential properties and increased on-site development activities.

• However, the investment and asset management segment experienced a 73% decline in PBT. This decline was predominantly attributable to a recognised share of loss totaling RM15.4mn, resulting from higher finance costs associated with its overseas ventures' long-term investment assets. The segment also experienced margin compression in the retail subsegment as a result of higher mall operating expenses.

• The leisure segment displayed resilience, with 9% YoY growth in revenue to RM45.3mn. Additionally, the segment's PBT saw notable improvement, rising to RM0.6mn compared to RM0.2mn in 1H22 (excluding the RM8.9mn gain from the disposal of a leisure property in Vietnam). This improvement was primarily attributed to higher revenue from events, food and beverages, as well as golfing activities.

• In the second quarter of 2023, core net profit experienced a 19% sequential growth to RM68.4mn, despite a mere 0.5% increase in revenue. This improvement was attributed to increased interest income and reduced share of losses from joint ventures during the quarter.

• In 2Q23, new property sales decreased by 22% YoY but rose by 19% QoQ, amounting to RM819mn. This brought the YTD 1H23 new sales to RM1.5bn (-22% YoY). Notably, industrial properties led the sales contribution for 1H23, accounting for 40% of total sales. The YTD sales represent 65% of the FY23 initial sales target. Unbilled sales inched higher to RM3.77bn from RM3.61bn in the previous quarter.

Impact

• After adjusting the timing of revenue recognition for property development projects and increasing the proportion of JV losses to align with the 1H results, our earnings for FY23-25 are reduced by 4-21%.

• We maintain our FY23/24/25 sales assumptions of RM2.8bn/RM3.2bn/RM3.5bn respectively.

Briefing Highlights

• In 1H23, SDP successfully launched a diverse range of products valued at RM2.1bn GDV across its established townships, which accounted for 70% of the initial RM3.0bn GDV launches for 2023. Residential landed launches achieved an impressive 80% average take-up rate, while industrial products achieved 88% on average. With approximately RM1.9bin in secured bookings, positive sales prospects are evident for 2H.

• SDP is confident that the strong momentum seen in 1H23 will continue into the second half of the year. Thus, it is revising its sales target from RM2.3bn to RM2.7bn and its GDV launch target from RM3bn to RM4bn. Despite the upward revision, we believe the new sales target remains conservative in light of the substantial bookings and upcoming new launches. We maintain our FY23 sales assumption of RM2.8bn.

• SDP's earnings are expected to significantly strengthen in the remaining quarters of 2023. With a robust sales performance in recent years, the group is set to deliver over 4,000 units of vacant possession in 2023 (730 units were delivered in 1H). In particular, 34% of the RM3.8bn unbilled sales will be recognised in FY23. Moving forward, the group will prioritise product delivery, project execution, and management while maintaining prudent cost control.

• We are optimistic about SDP's venture into rooftop solar energy solutions. This move aligns with SDP's strategy to evolve into a real estate company with diversified revenue sources by 2025. It also complements the Government's aim to attain 70% renewable energy capacity by 2050. To kick off, SDP is collaborating with the government to identify the best approach and system for a rooftop solar pilot project in their upcoming City of Elmina development in Shah Alam.

Valuation

• The property sector is experiencing renewed investor optimism due to a number of factors, including the anticipated end of the BNM's OPR hike cycle, the potential land value enhancement from major infrastructure projects (HSR, RTS, and MRT3) as well as the establishment of special financial/economic zones, and the possibility of homeownership-friendly policies. This upbeat outlook is anticipated to continue, which could result in ongoing gains for property stocks.

• Given the positive outlook, we raise our target P/Bk multiple from 0.4x to 0.6x, and arrive at a new TP of RM0.87/share (previously RM0.59/share). This new P/Bk multiple of 0.6x represents +1.0 SD from the stock's 5-year average P/Bk of 0.5x. We believe this valuation above the average is reasonable, considering the company's journey towards enhanced income diversification and value growth. We maintain our Buy recommendation on SDP.

Source: TA Research - 29 Aug 2023