Key takeaways from Sime Darby Property (SDP)’s 2Q24 results briefing include: 1) minimal future IFRS 17 impacts expected for Battersea Power Station, 2) strong demand fuels 17% upward sales target revision, and 3) data centre development aligns with SHIFT25 strategy. We raise our FY24-26 earnings forecasts by 10-14%, reflecting the strong 1H24 performance. We maintain our Buy rating on SDP with a higher target price of RM2.00/share, based on 1.2x CY25 BPS with a 5% ESG premium.

Minimal Future IFRS 17 Impacts Expected for Battersea Power Station

Sime Darby Property (SDP) reported a larger share of JV loss for 2Q24, amounting to RM87.9mn, compared with RM21.9mn a year ago, largely due to the adoption of IFRS 17. This loss was primarily driven by the accounting treatment for a five-year rental guarantee on the newly completed office tower, 50 Electric Boulevard in Phase 3B of the Battersea Power Station (BPS) project. With an initial occupancy rate of just 20%, the accounting standards required SDP to recognise the full financial impact for the entire contract period upfront, leading to a significant loss this quarter.

Management stressed that they took a conservative approach by absorbing the bulk of the accounting impact in this quarter. As a result, they do not anticipate any substantial further financial implications for the remainder of the year unless there are significant changes in occupancy rates or macroeconomic conditions. The focus is now on improving tenant occupancy, which is expected to mitigate any future financial effects. Recent positive developments, like the UK interest rate cut, also suggest a more favourable outlook for the BPS project. Management is optimistic about increasing occupancy, targeting 50% within the next 12 months and 80% thereafter.

Strong Demand Fuels 17% Upward Sales Target Revision

In 1H24, SDP's performance was notably strong, with the property development segment's PBT surging by 133% to RM476mn. This growth was fuelled by robust sales in industrial and residential properties, significant construction progress, and land monetisation in Selangor amounting to RM96.1mn. New property sales also demonstrated impressive results, with a 40% YoY increase to RM2.1bn, marking the highest first-half sales since the 2017 demerger. Industrial properties led the sales, contributing 35% of 1H24 sales. In 1H24, SDP launched products with a GDV of RM2.3bn, achieving 59% of its full-year target of RM3.9bn. As of 11 August 2024, the average take-up rate for all products had reached 77%.

With property sales reaching RM2.1bn in 1H24 and bookings of RM2.2bn secured as of August 11, 2024, management has revised the FY24 sales target upward by 17%, from RM3.0bn to RM3.5bn. Overall, management foresees robust growth in the group’s property development segment this year, driven by diversified launches, especially in industrial and residential products.

Data Centre Development Aligns With the Group’s SHIFT 25 Strategy

SDP is making strides in its SHIFT25 strategy by significantly expanding its industrial and commercial portfolios, aiming to diversify income and enhance overall value. A major highlight of this initiative is the RM2.0bn hyperscale data centre being developed for Google at Elmina Business Park. This project not only marks SDP’s entry into the data centre sector but also supports its SHIFT25 objective of increasing recurring income and broadening revenue streams. The presence of Google's data centre is expected to enhance SDP’s reputation and attract additional investments to its industrial parks. During the briefing, management also mentioned ongoing negotiations with data centre operators to explore further development opportunities within its industrial parks.

Forecasts

We raise FY24-26 sales assumptions higher by 11-13% to RM3.6-4.3bn, reflecting the strong 1H24 results, driven by solid take-up of recent launches and a robust upcoming launch pipeline. Additionally, we also raise our EBIT margin assumptions higher by 1-2%-pts to account for the more favourable product mix. As a result, our FY24-26 earnings are adjusted upward by 10-14%.

Valuation and Recommendation

We remain positive on SDP due to its strong presence in the landed residential and industrial property segments, along with clear earnings visibility supported by unbilled sales of RM3.7bn and a healthy balance sheet with a net gearing of 22% as of 2Q24. Furthermore, anticipated news on data centre deals is likely to boost interest in the stock. Following our updated earnings projections, we have revised our target price to RM2.00/share (from RM1.98 previously), based on a CY24 P/Bk of 1.2x with a 5% ESG premium factored into our valuation. Reiterate Buy.

Source: TA Research - 26 Aug 2024