Sime Darby Property’s Battersea JV may drag future net earnings, say analysts

• "Going forward, Sime Darby Property looks to add more industrial products into its mix, which are made up mostly of residential projects, landed or high-rise."

KUALA LUMPUR (Aug 29): A wider-than-expected share of losses in Sime Darby Property Bhd’s Battersea Power Station (BPS) joint venture (JV) is a cause for concern among analysts, based on the group’s financial results for the second quarter ended June 30, 2023 (2QFY2023).

The property group recorded losses from its BPS JV, which widened to RM46.7 million for the first half ended June 30, 2023 (1HFY2023), compared with RM7.1 million losses for 1HFY2022, due to higher interest charges, said CGS-CIMB Securities Sdn Bhd in a note on Monday.

“Downside risks include delays in planned launches, which could result in missing the sales target, and wider-than-expected share of losses from the Battersea Power Station joint venture, which could drag overall net earnings,” the research outfit said.

CGS-CIMB made no changes to its earnings forecasts and target price (TP) of 87 sen a share. The research house reiterated its "add" call on strong demand momentum for Sime Darby Property's products, premium branding, larger land bank in the Klang Valley, and strong balance sheet position (0.21 times net gearing as at end-June).

Similarly, Kenanga Research in a note said Sime Darby Property’s BPS JV will likely be in the red, no thanks to higher overall business expenses fuelled by the severely tightened monetary policies there.

“That said, the group believes that cost pressures may ease over time, particularly with more commercial leases being signed there and new apartment launches demonstrating encouraging take-up,” the research outfit said based on an analysts' briefing.

On other highlights, Kenanga said as at 1HFY2023, the group registered unbilled sales at RM3.8 billion, versus RM3.6 billion as at Dec 31, 2022, and 34% of the unbilled sales will be recognised in FY2023.

“The remaining 66% is expected to be recognised in the next three financial years. Going forward, Sime Darby Property looks to add more industrial products into its mix, which are made up mostly of residential projects, landed or high-rise,” Kenanga said.

It added that this could benefit the group by pivoting into a direct beneficiary of economic activity, and minimise exposure to potential oversupply in housing markets.

Kenanga raised its TP by 20% to 66 sen.

Public Investment Bank, meanwhile, in a note stated that its earnings estimates are kept unchanged for now, driven by Sime Darby Property’s projects launched in 1HFY2023, valued at RM2.1 billion, with an average take-up rate of 82%.

“Group pre-sales recorded totalled RM1.5 billion, which is already at 65% of the RM2.3 billion sales target for FY2023. As such, Sime Darby Property revised its sales target to RM2.7 billion and the gross domestic product launch target from RM3 billion to RM4 billion.”

The research firm maintained its "outperform" call, with a higher TP of 80 sen, given Sime Darby Property’s attractive fundamentals.

For 2QFY2023, Sime Darby Property’s net profit fell 32% to RM71.07 million, from RM104.99 million a year earlier, on the back of higher share of losses from JVs. Revenue for the quarter rose to RM688.92 million, from RM615.61 million a year ago.

Despite the lower earnings for the quarter under review, Sime Darby Property declared an interim dividend of one sen per share, amounting to a payout of RM68 million.

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