Sime Darby Bhd (April 17, RM9.28)

Maintain add with an unchanged target price of RM9.80: Sime Darby Property’s 40%-owned Seriemas Development has entered into a conditional sale and purchase agreement (SPA) to sell 342.5 acres (138.6ha) of land in Bangi to S P Setia for RM447.6 million (or RM30/sq ft), with profit-sharing of 20% of the pre-tax profit from the development, subject to a maximum of RM44.7 million (or RM3/sq ft).

Seriemas is 40%-owned by Sime Darby Property and 60%-owned by PNB Development, which is a wholly-owned subsidiary of PNB. Seriemas’s principal activity is property development. PNB also holds a 55% stake in S P Setia.

The land is planned for a mixed development township comprising residential and commercial segments. The proposed development is expected to have a gross development value of RM2.74 billion. S P Setia targets to launch the township development of the land in 2019.

The development is expected to take at least eight years to complete.

The sale will be settled in cash. The first 10% payment will be paid to Seriemas upon execution of the sale and purchase agreement while the second payment of 90% will be paid on or before the expiration of three months from the fulfilment of the last of the conditions precedent.

The proposed acquisition is expected to be completed by the fourth quarter for financial year 2017.

The parties arrived at the selling price on a “willing buyer-willing seller” basis after taking into account the indicative market value of the land of RM477.7 million by an independent valuer. We are of the view that the selling price for the land is fair.

We are positive about this news as we estimate Sime Darby Bhd could reap gains of RM111 million from the sale of the land via its 40% stake in Seriemas. Assuming the gain is recognised in the financial year 2018 via higher associates’ earnings, it could bump up Sime Darby’s net profit by 4.6%. We have not incorporated this into our earnings forecasts pending the completion of the deal.

Our rough estimated net profit gain from the sale of land for Seriemas is RM270 million. We arrive at the potential gain after deducting RM26 million for the original cost of investment of the land, estimated RM74 million cost of converting the land to property development, and 20% effective tax rate on the pre-tax profit gain from the sales consideration of the land of RM447.6 million.

We expect Sime Darby’s share price to be rerated on its plans to separately list its plantation and property units and improving earnings prospects on better crude palm oil and coal prices.

Key risks are lower fresh fruit bunch output and lack of corporate actions to boost its valuations. — CIMB Research, April 17

Sime Darby

This article first appeared in The Edge Financial Daily, on April 18, 2017.

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