(Dec 6, RM5.24)
Maintain outperform at RM5.25 with a fair value of RM5.94: Over the weekend, The Edge weekly speculated that Sime Darby Property will merge with S P Setia. We do not rule out the possibility, given the common major shareholder — PNB, which owns 48% equity interest (Skim Amanah Saham + PNB) in Sime Darby — and Sime may divest non-plantation assets, property, motor and industrial, in order to better concentrate on its plantation business. It was also mentioned that PNB could inject its own property assets into S P Setia as well, which include the privatised Pelangi, Petaling Garden and I&P. On the other hand, taking a cue from the other plantation players which group their property business together (IOI and Genting Plantation), Sime may retain its profitable property division to sustain its recurring income, considering its depressing earnings from the O&G division.
While S P Setia is known for its brand name and expertise, Sime has close to 8,000 acres of landbank, with and without development plans, spread across the Klang Valley, Negeri Sembilan, Kedah and Pahang. Key ongoing projects are USJ Heights, Bandar Bukit Raja, Ara Damansara, Denai Alam and Nilai Impian. Based on Sime’s FY10 revenue and earnings before interest and tax (Ebit) of about RM1.8 billion and RM450 million for its property division (similar to S P Setia’s earnings base) and applying 15 to 20 times PER multiple (benchmark valuations on S P Setia without a premium), we estimate the division would be worth about RM5 billion to RM6 billion if Sime were to divest its property arm.
Based on S P Setia’s track record, while the company will continue to do well even without a new partner, it may fall off the investor radar screen upon the completion of the ongoing mega mergers, as the merged companies will be much larger and their shares will be more liquid. Note that S P Setia was the second largest after UEM Land in terms of market cap. Post corporate exercises of other companies, it will fall to the third position and its premium valuations could be narrowed over time as investor interest is drawn away.
The risks include: (i) competition from peers; (ii) regulatory risk; (iii) delays in launches and approvals; and (iv) country risk.
Our forecasts remain unchanged. The share price has performed well since we upgraded the stock in October. We maintain our “outperform” rating on the stock as we believe the speculation on possible M&A will support the share price. We keep our indicative fair value unchanged at RM5.94 (20% premium on RNAV) for now, pending the company’s results announcement on Thursday. — RHB Research Institute Sdn Bhd, Dec 6
This article appeared in The Edge Financial Daily, December 8, 2010.
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