• SML 3Q14 revenue dipped slightly of 8.7% y-y to S$208.6mn; 9M14 revenue decreased 23.7% y-y to S$642.4mn due to land parcel sales in 2013. Adjusting for the one-time land sales, 9M14 revenue was up 10% y-y
• 3Q14 PATMI increased 11.9% y-y to S$44mn with lower cost of sale and minorities
• Superior gross profit and EDITDA margins at 71% and 57% respectively
• Expand recurring income with acquisition of commercial building in Soho London
• Expect strong sales momentum to continue into FY15
• Maintain Buy Rating with revised TP of $0.96

What is the news?

SML announced 3Q14 revenue of S$208.6mn, bringing 9M14 revenue to $642.mn, a drop of 23.7% y-y due to the huge land parcel sales of S$317.3mn to its JVs and associates in FY13. Excluding the one-time land sales, the 9M14 revenue was up 10% y-y. 3Q14 PATMI was up 11.9% y-y with lower cost of sales and minorities, but 9M14 PATMI declined 39.2% y-y with absence of the land sales. Gross and net profit margins maintain healthy at 71% and 44% respectively. Sales of development properties and land accounted for 79% of the 9M14 revenue while recurring income make up the balance 21% (up from 18% previously). SML has expanded its London portfolio with acquisition of a strategically located freehold prime commercial building at Soho London to augment its recurring income. Balance sheet remains strong with net gearing ratio at 2%.

How do we view this?

With the denouement of the recent presidential election and the relatively smooth transfer of power to the new government, there has been increasing demand for industrial land in Indonesia. The country has witnessed a pick-up of FDI of 16.9% in 2Q14 and reached all-time high at IDR78.3 trillion in 3Q14. SML has revealed that Deltamas has recently secured a few deals with customers like Mitsubishi and others for sales of approximately 146ha of industrial land, worth USD 220mn in total. At least 59% (USD 130mn) of sales would be recognized in FY15, balance in FY16. With an abundant land bank on-hand, SML is in good position to benefit from the continued robust sale momentum as more companies relocating or expanding manufacturing operations in Indonesia.

Besides unlocking value from its land bank, SML also focuses on growing its recurring income either via acquisitions or investment property developments. Subsequent to the second purchase of the London property is the completion of the Indonesia Convention Exhibition (33% stake), the largest MICE centre in Indonesia, in end 2014 and AEON Mall BSD City (49% stake) in mid 2015. The management aim to diversify its business operations by seeking value accretive acquisitions on the international platform such as London and Australia.

Investment Actions?

We continue to favour SML for the potential lucrative returns from the land sales of its huge land bank and strong balance sheet with war chest of S$755mn. The superior profit margin indicates the positive outlook of the real estate market in Indonesia. Trading at a discount of 59% to our valuation, SML is deeply under-valued. Maintain Buy rating with revised TP$0.96.

Source: Phillip Securities Research - 14 Nov 2014