Sime Darby - Signs concession deal with government Buy

- It was announced to Bursa that Sime has:- (1) entered into a joint-venture with Tunas Selatan Pagoh – a government arm – on a 60:40 equity split for the development of education campuses, and (2) signed concession agreements with the government to construct and maintain new campuses for four education institutions, within Pagoh, Johor. We understand the construction cost is RM993mil. 

- The four universities will be built on a 507acre-piece of land, which would be acquired by the government from Sime for RM50.6mil. There will be a gain of about RM32mil for Sime following the disposal.

- The JVCo would be leasing the campuses to the government for 20 years for a total fee of RM3.54bil comprising:- (1) RM2.6bil for availability charges, (2) RM764.5mil for asset management services, and (3) RM157mil for teaching equipment cost over the first five years of the 20-year lease.

- Although we were quite surprised by this deal, we recognise the fact that this is in-line with Sime Darby Property’s long-term strategy of growing its recurring income. Recall that a few months ago, Sime announced that it would be co-developing a retail mall in Melawati with CapitaMalls Asia.  Apart from that, we are also positive that Sime would be able to monetise its landbank in an area an otherwise lacking strong immediate development potential. 

- We are keeping our estimates at this juncture given that the earnings would only kick in from 2016, which is beyond our forecast horizon. We estimate Sime would generate about RM530mil in EBIT or about RM27mil per annum throughout the lease tenure. The gain from the disposal of the land would also have a minimal impact on our forecast.

- We maintain BUY on Sime Darby with our fair value unchanged at RM12.10/share, pegging a 10% discount to our SOP estimate of RM13.40/share. Sime is currently trading at a decent CY13F PE of 14x, an about 20% discount against its peers of 17x.    

Source: AmeSecurities