Sime Darby unlocking asset value through land sale

Sime Darby Bhd
(July 7, RM9.66)
Upgrade to outperform with target price of RM10.50: Sime Darby has announced that it is selling its freehold land in Sungai Buloh, Selangor for RM239.8 million to Eastern & Oriental Bhd (E&O). The 135-acre (54.6ha) tract will be carved out from the current 843 acres land owned by Sime Darby Elmina Development Sdn Bhd.

Currently, the land is meant for plantation purposes but Sime Darby will procure the relevant approval to convert its status to residential and commercial.

We gather that the land price of RM239.8 million includes RM192.8 million as cost of the land and RM47 million as cost of the major infrastructure.

Note that Sime Darby needs to construct the infrastructure (drains, main roads, incoming water and sewerage reticulation pipes, electricity and telecommunications cables) within 36 months.

The agreement between Sime Darby and E&O also states that the baseline gross development value (GDV) for the project is RM1.54 billion. If the actual GDV exceeds RM1.54 billion, Sime Darby is still entitled to 20% profit sharing on any GDV above the baseline GDV.

The deal is only expected to be completed in the first quarter of calendar year 2019 as it will take time for Sime Darby to get the land title converted and construct the infrastructure.

The deal is justified because it will enhance the combined branding and value of Sime Darby’s City of Elmina project, also located in Sungai Buloh.

Separately, The Wall Street Journal reported, quoting “people familiar with the process”, that Sime Darby had invited banks to pitch for a mandate to advise it on an initial public offering (IPO) of its automobile business, which is likely to raise about US$500 million (RM1.6 billion).

The Sungai Buloh land valuation works out to RM33 per sq ft (psf). We think this pricing fair as it is close to the current asking price of RM35 psf for nearby tracts of land. We are positive on this sale as it enables Sime Darby to unlock the value of its land bank while keeping the option to enjoy the upside of the project should the GDV exceed RM1.54 billion. Additionally, Sime Darby can still benefit through its 22% associate stake in E&O.

We believe that the sale of the land is targeted at realising the value of its property assets. In the mid term, we expect more corporate exercises involving Sime Darby’s property division and this could include a reverse takeover, merger and acquisition or even acquiring a real estate investment trust (REIT). There was speculation by the media that Sime Darby is looking to acquire a REIT into which it injects its commercial properties. Regardless of the eventual method Sime Darby chooses to realise the hidden value in its property division, we believe the group is now in the stage of unlocking the hidden value of most of its non-plantation divisions which we believe has caused its valuation to stay low against its peers.

In the past three months, Sime Darby has proposed four deals, all of which were related to the sale or reduction of its stake in its non-plantation divisions. If market talk of the motor division’s IPO materialises, it may be the fifth such deal.

We are positive about this direction as it should allow Sime Darby to emerge from the current value trap of being a conglomerate which usually commands lower price-earnings valuation (against pure plantation companies). — Kenanga Research, July 7


This article first appeared in The Edge Financial Daily, on July 8, 2014.