Sime Darby Property - Forays Outside of Comfort Zone

Date: 
2024-02-26
Firm: 
KENANGA
Stock: 
Price Target: 
0.84
Price Call: 
HOLD
Last Price: 
0.945
Upside/Downside: 
-0.105 (11.11%)

SIMEPROP’s FY23 results beat expectations. Its FY23 core net profit jumped 45% driven by strong sales of residential and industrial products, which will remain its key focus in FY24. We raise our FY24F earnings by 9%, lift our TP by 22% to RM0.84 (from RM0.69) but downgrade our call to MARKET PERFORM from OUTPERFORM after the recent run-up in its share price.

Above expectations. SIMEPROP’s FY23 core net profit of RM398.2m (excluding RM9.7m reversal of provisions) beat our forecast and fullyear consensus estimates by 6% and 12%, respectively. The variance against our forecast came largely from stronger-than-anticipated sales of both residential and industrial products.

YoY, its FY23 revenue rose 25%, primarily driven by robust sales in both industrial and residential sectors, coupled with enhanced on-site progress development. Its core net profit surged by a steeper 45% as improved efficiency in sales and marketing efforts alongside stable administrative expenses contributed to an enhanced operating margin at 17.6% (+1.7%), more than offset the the doubling in losses from joint ventures, primarily attributed to Battersea due to increased operating and interest costs in the UK.

QoQ, its 4QFY23 revenue saw a decline of 4% attributed to a lumpy land sale recognition seen in the preceding quarter. On the flipside, operating margins were dragged by fair value adjustments during the period, which resulted in a 16% decline in core net profit.

The key takeaways from its results briefing are as follows:

1. It reported sales of RM3.3b in FY23, which surpassed its sales target of RM2.7b. It has set a sales target of RM3.0b for FY24, underpinned by SEED Homes via a JV with Lagenda, and industrial products. Our forecasts assume higher FY24 sales of RM3.5b as SIMEPROP tends to be conservative in its sales targets. As at end-Dec 2023, its unbilled sales stood at RM3.6b (vs. FY22: RM 3.6b)

2. Looking forward, SIMEPROP is expanding its product mix by introducing more high-rise developments and industrial projects. This initiative reflects a proactive approach to capitalize on market demand and diversify its product offerings.

3. The losses at Battersea expanded in FY23 and there is no sign of a swift turnaround. SIMEPROP is taking a long-term view on the UK market as far as Battersea is concerned. The group is presently exploring options such as revamping the Battersea team and placing greater emphasis on asset management to attract investors and buyers.

4. In 4QFY23, its average take-up rate of properties improved to 80% (vs 3QFY23: 70%). This was despite the introduction of highrise homes and industrial products (in addition to its bread and butter landed homes), signaling opportunities in these segments. 5. Its investment and asset management segment is set to expand, with the group's upcoming near-term projects including Elmina Lakeside Mall in CY2024 and another in CY2025. KL East Mall, having achieved a 90% occupancy rate and improved yield, highlights the group's inclination towards further expansion in this sector.

Forecast. We raise our FY24F earnings forecast by 9% to factor in stronger results from the group’s industrial products segment. That said, persistent losses from its associates are underpinning YoY earnings growth (+2%). Meanwhile, we introduce our FY25F numbers which may see more upbeat earnings (+8%) from higher progress billings arising from its new launches.

Valuations. We raise our TP to RM0.84 (from RM0.69) following FY23A results and RNAV updates (mainly on better longterm margin assumptions to 8% from 7%). We apply a 60% discount to RNAV (in line with sector average of 60%-65%), which we believe fairly reflects SIMEPROP’s more diversified portfolio of products. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. We like SIMEPROP for: (i) its diversified portfolio in both landed residential and industrial products which reduce its dependency on residential high-rise products, (ii) strong foothold in matured townships, (iii) proactive initiatives to boost recurring income via strategic investments. That said, its valuations have become rich after the recent rally in its share price. Downgrade to MARKET PERFORM from OUTPERFORM.

Risks to our call include: (i) sustainability of the recovery of the local property market, (ii) elevated mortgage rates which erode affordability, (iii) construction cost inflation, and (iv) risks associated with overseas operations including forex.

Source: Kenanga Research - 26 Feb 2024

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