SIMEPROP’s 9MFY23 results beat expectations on strong take-up of its residential and industrial products. It is launching more of these in response to the strong market demand. We raise our FY23-24F earnings forecasts by 34% and 19%, respectively, lift our TP by 5% to RM0.69 (from RM0.66) and upgrade our call to OUTPERFORM from MARKET PERFORM.

Above expectations. SIMEPROP’s 9MFY23 core net profit of RM276.7m beat expectations, already accounting for 99% and 89% of our full-year forecast and full-year consensus estimates, respectively. The variance against our forecast came largely from better-than-expected top line performance from strong take-up of residential and industrial products.

YoY, its 9MFY23 revenue surged 36%, primarily driven by higher demand in the property market which led to higher property development contributions from their stronger sales and combination of industrial and residential products and increased on-site progress development. However, due to a shift to slightly less favorable product mixes, gross margins tipped down slightly to 27.3% (-0.8ppt). That said, thanks to more effective sales and marketing efforts and stable admin expenses, operating margin was more efficient at 32.7% (+2.6%). Its JV continued to make losses of RM72.3m (+100%), mainly coming from Battersea due to increased operating costs in the UK. Despite that, SIMEPROP’s 9MFY23 core net profit came in at RM276.7m (+73%).

The key takeaways from its results briefing are as follows:

1. As at 9MFY23, the group registered unbilled sales of RM3.7b (vs. 9MFY22: RM 3.5b) with 17% of it to be recognized in 4QFY23. The remaining 83% is expected to be recognized over the next three years. The group achieved total sales of RM2.5b, which is on track to exceed its RM2.7b sales target for FY23, although the group reserved from providing an updated target.

2. Moving ahead, SIMEPROP aims to incorporate additional high-rise developments and industrial projects into its product mix, indicating a strategic effort to leverage market demand and broaden its offerings. This move has the potential to enhance the group's financial standing and reinforce its presence in the market which has been mostly township-focused.

3. Its perspective on Battersea involves a longer-term outlook in the UK, with no immediate expectation of a quick turnaround. In the short term, Battersea is not anticipated to yield positive results. SIMEPROP is currently considering a redesign of the Battersea team and emphasizing the asset management business to attract both investors and buyers.

4. The average take-up rate of landed properties was at 70% as of 5 Nov 2023. Historically, the group used to introduce landed properties with unit counts ranging from 80 to 100, but they have now increased the scale to approximately 350 units upon launching. This shift reflects the group's confidence in the market's positive response to its product offerings. While the group's primary focus is on landed properties, their success in high-rise projects and industrial project launches suggests a positive market reception and it plans to actively expand into these segments.

Forecasts. We raise our FY23-24F earnings forecasts by 34% and 19%, respectively, largely to reflect stronger deliveries by its property development segment, of which the group seems to possess a steady GDV pipeline and backed by product launches. For FY23, this may also be supported by the unlocking of unsold inventories.

Correspondingly, we lift our TP by 5% to RM0.69 (from RM0.66). Our higher TP follows updates to our RNAV inputs of 60%, where SIMEPROP is able to extract greater GDVs from its launches, facilitated by a more diversified portfolio. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5)

We like SIMEPROP for: (i) its diversified portfolio in both landed residential and industrial products which reduce its dependency on residential high-rise products; (ii) strong foothold in matured townships, (iii) proactive initiatives to boost recurring income via strategic investments. Value has emerged after the recent correction in its share price. Upgrade to OUTPERFORM from MARKET PERFORM.

Risks to our call include: (i) a prolonged downturn in the local property market, (ii) rising mortgage rates further hurting affordability, (iii) rising construction cost, and (iv) risks associated with overseas operations.

Source: Kenanga Research - 27 Nov 2023