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Saturday, February 6, 2010

Does Sime Darby need Sunrise?

Last week, one property deal was a bit of a puzzle when all the pieces refused to fit snugly no matter which way you moved them around.

That was the deal by conglomerate Sime Darby to develop a RM1bil commercial development in its established Bukit Jelutong housing area in Shah Alam with another property developer, Sunrise.

The questions are: Why does Sime Darby, a developer with a long and varied track record, need Sunrise, an established condominium developer with limited experience in commercial development, to put up a commercial centre? Has not Sime Darby more expertise than Sunrise in this area?

First the facts. Sime Darby and Sunrise will have equal stakes in a joint venture to develop 20.95 acres in the 180-acre Bukit Jelutong township. The land comes from Sime Daby’s huge land bank, probably the largest in the country.

The price of the three pieces of freehold commercial land is RM114mil, or RM125 a sq ft. That is a rather good price for a buyer considering that the gross development area is 2.7 million sq ft and it is a RM1bil project. In fact, one may be hard put to buy residential land in Bukit Jelutong at that price now!

The project will consist of retail, shopoffices, office-suites and serviced apartments. It will be launched and developed in 5 phases from 2011 onwards. The overall project is expected to be completed seven years from the launch of the first phase.

If one breaks up the profit from the project and allocates it over the years, it does not really make much difference to Sime Darby.

If we assumed a 20% gross margin, gross profits for the whole project would be RM200mil and over seven years that amounts to less than RM30mil per year. The half share for each party will be less than RM15mil a year.

On a proportionate basis, that makes a lot more difference to Sunrise’s bottom line than Sime Darby’s which is a giant of a company with the largest market value of any listed company in Malaysia.

So what is in it for Sime Darby? The company says it is trying to accelerate property development. Sime Darby is also one of the largest, if not the largest property developer, in Malaysia with a considerable amount of resident expertise.

But in return for expertise from another developer, it is selling its share of the land at a very low price and forsaking half of the profit from the development venture to its partner. Could it not at least have obtained a better deal for itself?

And why can’t Sime Darby develop the land itself? Many of us will recall Sime Darby as the developer of the very successful and massive Subang Jaya township which included the development of a very vibrant mall together with a commercial centre.

That is clear indication that it has all the expertise that it needs in-house. If it lacked for anything in any particular area, it would be quite easy to purchase the expertise initially and develop it in-house after that.

After all, there are many architects, consultants, designers and planners who will do this job for a fee and to whom you will not have to surrender 50% of profits through a joint venture.

On top of that, the hinterland for this commercial development is already there – Sime Darby’s Bukit Jelutong is a very successful residential property venture and already has 25,000 people staying there. That makes it much easier for the commercial development to succeed.

Sime Darby has hundreds of thousands of acres of plantations. Land banks with development potential number in the tens of thousands of acres. If it does not have sufficient in-house capacity to develop these, it had better develop it fast. Meantime it can buy it.

Otherwise, it is going to needlessly pass on profits which could be its own to other developers, in this case, a developer much more junior and smaller to it and which has a much narrower area of expertise. Sunrise’s one major commercial development is Solaris in Mont’Kiara, incidentally its area of concentration.

As a major government-linked company substantially owned by Malaysian trust agencies and funds, Sime Darby must be always mindful to extract the best value for its shareholders, especially from valuable land banks which it has held for decades. Whichever way one tries to fit the pieces, there is just one conclusion – the deal benefits Sunrise much more. It gets valuable land at a very reasonable price from a competing and competent developer, manages it and reaps equal profits from it.

How much better a deal than that can one get? And why?

Managing editor P Gunasegaram often has trouble understanding strategic moves by Malaysian listed companies.

By The Star (by P. GUNASEGARAM)

1 comment:

Anonymous said...

Sime darby must plan to build houses for the lower and average income groups and look into development of apartment or condo. with prices around RM 100,000 .Area can be smaller and affordable. Expensives are no more a requirement as the rich can have their own choice to build their own houses.
The gvoernment is looking at 1 Malaysia concept and it can never work if the commercial developers sectors are focusing on the high end. I believe the government will support this concept of beehive condo or apartments for young couples or bachelor with low income. Always look back at the history and at the present why there are so many NPL deafaulters. You can also be one of them in a matter of time.This year is a critical year and there are many unhealthy areas that need to be rectify .
If developers are profit oriented they will never last long .The time has come for changes and developers concept has to change.
It is predicted that 50% unemployment will take place in and within this 2 years and 30% on mobile employment with 10% with permanent employment with salaries pay cut. take corrective action early before it is too late.You dont create a wealth of debtors as the bank will go bust. Our financial economy system is getting backwards slowly as computerisation take place and artificial intelligent system takes place.50% of human labour will not be required in the very near future. Think about it as it may sound crazy. There will come a time you see alot of robbin hoods cash in on the filthy rich.
look at United States and Russia what is going through and africa.
Road has come to and end and there must be changes before the collapse of the economy. Act fast when you cannot see the depth of the ocean even it is clear.
There will come a time the rich become blind beggars . For the sins of money is the price they have to pay.Do what U can do for the people and do not do the things to profit from the pockets of the people.Petronas is feeding the government satff and the commercial sectors are feeding their ownselves and the question is how long ? Be wise