SDG has entered into an MoU to develop another industrial park in Bukit Pelandok, Negeri Sembilan. However, unlike earlier, smaller halal-centric manufacturing hub, this proposal is larger and will probably serve a broader industry base. No timeline has been indicated nor how the partnership will be structured. Maintain FY24−25 core net profits, TP of RM4.60 and MARKET PERFORM call. At current valuations, some property development news is already in the price.

SDG has entered into an MoU with: (a) Eco World Development Group Bhd, and (b) NS Corporation Sdn Bhd (NS) which is a Negeri Sembilan state entity. The MoU involves 1,166 acres (472ha) and should attract industrial interest for several reasons:

1. Well located. SDG's Ladang Bukit Pelandok (c.1,800ha) is located within half an hour's drive from KLIA and Port Dickson, 40min from Seremban and within 90min from Kuala Lumpur. It therefore has good connectivity. The land is also located within Malaysia's Vision Valley 2.0 (MVV2.0), a long-term undertaking by Negeri Sembilan to develop the state hence more infrastructure including roads can be expected.
2. Eco World is an experienced development hand, with expertise ranging from residential to commercial to industrial properties. Non- residential projects include Eco Business Park I to V in Johor and Selangor. More recently in Aug, Eco World unveiled QUANTUM Edge, a digital and high-tech industrial park located in Johor with Microsoft Payments (Malaysia) Sdn Bhd as a key anchor.
3. Should complement earlier Bukit Pelandok industrial development MoU. In Aug 2024, SDG signed an MoU with Lembaga Tabung Haji wholly-owned property unit, TH Properties Sdn Bhd (THP), to co-develop a 464-acre (188-ha) halal food hub in the latter's Bandar Enstek development in Negeri Sembilan. Bandar Enstek's industrial park "techpark@enstek" is already home to F&B giants such as Coca-Cola, Kellogg's and Ajinomoto but is maturing. Therefore, SDG's land will allow techpark@enstek to expand further.
4. Higher ROE ahead but returns could be even better. Plans by SDG to maximise returns from its asset base, namely well located landbank, is welcomed as the group should see better ROE which has been trailing peers thus far. YTD, SDG has announced: (a) investigating the viability of developing a 1,000-acre Kerian Integrated Green Technology Park (KIGIP) with parent PNB in May 2024, (b) in Aug 2024, a co-development MoU with TH Properties for a halal manufacturing hub at techpark@enstek, and (c) JV with AME Elite Consortium Bhd (Non-Rated) to develop 641 acres of green industrial park in Kulai.

However, SDG indicated in Aug that effective 4QFY24, property will become a new operating vertical which suggests it may start attracting normal 24% corporation tax when it sells land into its JVs rather than incurring a 10% capital gains tax. Also, being new to property development, SDG pursuing all its development projects with partners, which means it has to share economic benefits, but also shields itself from excessive risks.

Forecasts. No change to core FY24−25 forecasts.

Maintain MARKET PERFORM and TP of RM4.60 based on 1.6x PBV, a discount to average 2x for large integrated peer due to SDG's lower 5-year average ROE of 8% vs. 10% of its peers. Efforts to broaden its core activities into industrial property development and RE are commercially sensible and should push ROE closer to peers. Nevertheless, such efforts take time (2−3 years or beyond) and face execution risks. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3) With some of its estates ripe for property development, SDG is defensive and undervalued from an asset point of view but long-term expansion plans and productivity management strategies would be viewed positively. The timing and actual impact on earnings are less clear; hence, we are keeping our MARKET PERFORM call.

Risks to our call include: (i) Western hostility towards palm oil on sustainability and bio-diversity issues, (ii) impact of weather and labour shortages on production, (iii) weak CPO and PK prices, and (iv) cost inflation particularly fertilisers.

Source: Kenanga Research - 19 Dec 2024