Sime Darby Property seen targeting more disposals

Sime Darby Property Bhd (Oct 1, RM1.15)

Initiate coverage at market perform with a target price (TP) of RM1.25: Sime Darby Property Bhd is a township developer with over 40 years of experience and a vast land bank of 20,600 acres (8,336.52ha) with an estimated remaining gross development value (GDV) of RM137 billion, but this does not include the option land agreements with its sister companies of another 20,600 acres which we estimate have a potential GDV of RM68 billion. It is also well-positioned as 87% of its developable GDV is in the Klang Valley where property demand is the strongest in the country. However, in terms of market capitalisation, it is only the third-largest after S P Setia Bhd and IOI Properties Group Bhd.

From July 2018 to December 2019, Sime Darby Property will launch RM3.5 billion to RM4.5 billion worth of GDV from Klang Valley-based projects in Elmina West, Serenia City, Putra Heights and Subang Jaya City Centre (SJCC). Residential units will make up 76% of the launches with the bulk targeted to be below RM800,000 per unit. The group targets sales of RM1 billion for the six-month period ending Dec 31, 2018, which is achievable since most are township products. 

They are also growing the industrial segment (18% of the launch GDV), focusing on light industrial and logistics businesses in the Greater Klang Valley. So far, 461 acres of land (or about RM5.1 billion GDV) have been identified for industrial development, of which 253 acres (including strategic joint ventures) will be used for industrial build-to-suit facilities that will be retained for recurring income purposes. The group aspires to grow its recurring income stream with a target of 10% of profit before interest and tax (PBIT) by the financial year ending June 30, 2023 (FY23). Hence, the decision to retain Pagoh Education Hub. We are expecting the sale of Battersea Phase 2 Commercial to take place as well, which will alleviate balance sheet concerns.

Developers with large land banks are also prone to “value traps” from an investor’s perspective. Sime Darby Property has been actively rationalising its non-core assets and selling down its inventories. They are targeting more disposals, expected to generate more than RM2 billion worth of gains over the next four to six years. Completed inventory as of FY18 stood at RM836 million at cost, of which 57% is from high-end projects Alya and The Glades, with a unit at more than RM1 million. Management is actively clearing its inventories, which may involve margin squeeze as the preference is to clear inventories for cash flow. On a positive note, the group has a low net gearing of 0.18 times. — Kenanga Research, Oct 1

This article first appeared in The Edge Financial Daily, on Oct 2, 2018.

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