Sime Darby: Zooming In On London Waterfront Development

THE BUZZ

Yesterday in a joint press release by SP Setia (SPSB) and Sime Darby, it was announced that the joint bid by SP Setia and Sime Darby Property (SDP) has been identified as the preferred bidder for the Battersea Power Station in London, by the Joint Administrators and Receivers. Subsequently SPSB and SDP have yesterday entered into an Exclusivity Agreement with the Joint Administrators and Receivers, on behalf of the owners of the property to acquire the site for GBP400m or approximately RM2bn.

OUR TAKE

A smart start. We view it as a smart move for Sime Darby to team up with SP Setia for the project. As far as we know, Sime Darby has little recent exposure to property development outside of Malaysia although it is one of the most established developers on the local scene. Hence teaming up with a stronger developer with more experience internationally such as SP Setia will help to mitigate the project risk. For SP Setia, Sime Darby brings to the table its balance sheet strength to see the project through. In the current economic environment, it may take time to maximise returns from this massive 39-acre waterfront project. Certainly, with enough holding power, SP Setia and Sime Darby could afford to start developing now when raw material prices are still cheap and launch it when economic backdrop gets more optimistic. According to recent reports, property prices all across the UK have been declining with the exception of London. We do not rule out the possibility of Sime Darby roping in niche property developer E&O to participate in the project especially in the area of product packaging.

Inexpensive purchase price. The RM2bn price tag for the 39-acre site translates into price per sq ft of RM1,177, which is not very different from prime land price in Kuala Lumpur city centre therefore we consider the price tag cheap. Although the plot ratio will be lower than a vacant piece of land given that the developer will need to preserve the façade of the iconic power station, we doubt it will raise the price per sq ft significantly.

Consistent with broad strategy. In streamlining its business, Sime Darby identified property development as one of the core businesses it intends to continue with. It is thus right for the company to attempt doing more with its property development arm, such as expanding overseas. We are also glad that Sime Darby chooses to do it now rather than when the property market is getting too heated. Having said that, investors buy Sime Darby either for its plantation business or for index exposure hence the foray into the UK property development will unlikely be rewarded in terms of stock price appreciation.

No change to forecast and FV. As the Battersea project is still far from materialising and visibility is very lacking, we are not factoring in any contribution to earnings. Maintain Buy on Sime Darby with FV unchanged at RM10.32.

Source: OSK