• Maintain BUY with a higher TP of MYR0.67, from MYR0.55, 14% upside and c.3% yield. Although Sime Darby Property’s solar renewable energy will unlikely have a significant impact on near-term earnings, we like management’s effort to enhance utilisation of its non-core landbank that has limited development opportunities which would otherwise be left vacant for years. Given a more efficient use of its landbank, our new TP is now based on a 70% discount to RNAV (from 75%) and a 4% ESG premium as we raise the company’s ESG score to 3.2, from 3.1.

• New venture in solar renewable energy. As part of its new venture in solar renewable energy, Sime Prop announced two pilot project proposals: i) Offering solar solutions in its existing townships by leasing rooftop space from residential homeowners to generate solar power of up to 150MW, and ii) commissioning of utility scale ground mounted solar farms in Jerai, Kedah (365 acres), and Pagoh, Johor (635 acres) potentially with a capacity of 330 MW. The offtakers will be the industrial, commercial, and retail users across Sime Prop’s townships. Management indicates that Sime Prop could be both generator, distributor, and offtaker of the solar energy.

• Opportunistic venture for developers with a large landbank. Given the rising trend of renewable energy globally, it is encouraging to see increasingly more developers participating in solar energy generation. We believe only developers with a large landbank - especially with land plots in remote areas without near-term development opportunities - are able to take part in solar power generation. These are typically the government- linked investment company developers and Sime Prop is one of them. Other developers, with limited non-core land, will probably not get involved, given limited land resources.

• More efficient use of land and better ESG scoring. We think Sime Prop’s venture into renewable energy makes sense as the company currently has c.6,000 acres of non-core land, out of 19,000 acres of landbank in the portfolio. The company has no development plans over the near to medium term on its non-core land therefore solar farming will be a good alternative for a more efficient use of land. It will also help to kick start developments of greener townships where townships are generators, and offtakers of the solar energy. For example, the solar farm in Pagoh is expected to supply the power generated to its future industrial park in Bandar Universiti Pagoh (BUP), as Sime Prop intends to transform and integrate BUP with new industrial zone that is more environmentally friendly and energy efficient.

• Potential JVs to help funding the capex. We think Sime Prop will seek funding for the solar farming capex from a few strategic investors, potentially using the similar structure as the collaboration with LOGOS. Debt financing should also be viable as more commercial banks are offering green financing in Malaysia at a slightly cheaper interest rate.

Source: RHB Research - 31 Jul 2023