Sime Darby - Gets hold of prime market, backed by 2 strong partners BUY

- We maintain our BUY rating on Sime Darby but, raise our fair value to RM13.50/share (from RM12.30/share previously), pegging a 10% discount to our revised SOP value of RM15.00/share – accounting for its 40%-stake in Battersea Power Station (BPS) redevelopment. 

- It has been announced that Sime Darby, S P Setia and EPF are forming a JVCo – with a 40:40:20 equity split – to undertake the redevelopment of BPS. The JVCo have also entered into an agreement with the Joint Administrators to acquire the 39.1-acre site for GBP400mil (~RM2bil) or at GBP235psf (about RM1,166psf). 

- Taking into account the construction cost of the initial phase – GBP200mil – the JVCo’s initial outlay would amount  to GBP600mil (~RM3bil). This is within means, accounting for just 7.5% of the GDV (GBP8bil or RM40bil). But taking into account the underground station and the restoration of the power plant, we estimate the JVCo would have to fork out an additional GBP312mil (RM1.55bil), albeit the timeline for this has yet to be determined. 

- Sime’s balance sheet position would remain comfortable. There are no details on how Sime would be financing this, but assuming a 70:30 debt to equity financing, Sime would have to fork out about RM360mil in cash and gearing would rise marginally to 0.26x from 0.22x as at end of March.

- While we are positive on this mainly because the JVCo would be going into a prime global property market at a trough, the emergence of EPF in this deal gives us a stronger assurance and confidence in the success of this development.  Sime Darby’s risks are cushioned by strong partners in S P Setia and the EPF.

- To recap, the site would be redeveloped into a mixed development project comprising gross floor space of 8 million sf, with half to be allocated for residential properties and the balance commercial and office properties. 

- We understand the Phase 1 of the development would comprise residential units and is expected to be launched in April 2013. While we are positive on the end demand for the properties, any meaningful contribution to earnings would only be seen in 2016/2017 given the build-then-sell concept. Thus, we are keeping our estimates at this juncture.   

- We are not expecting a strong reaction to this news given the long gestation period, but in the immediate term, the interest in Sime would be rejuvenated by any rebound in CPO prices.

Source: AmeSecurities