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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 19 Jul 2019, 9:58 AM

 

UEM Sunrise Berhad - Reducing Exposure in Desaru

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Positive on its move to reduce exposure in Desaru, due to the long gestation period coupled with weak property market sentiment in Johor. Furthermore, UEMS could better utilise its initial cash commitment for Desaru project for future land banking in matured areas. No changes in FY19- 20E earnings. Maintain MP, with a lower TP of RM0.835 (from RM0.850) as we lower our GDV assumptions for the Desaru project.

News. Last Friday, UEMS announced that their 51% joint-venture Desaru North Course Residences Sdn Bhd (remaining 49% is held by Desaru North Course Bhd, an indirect subsidiary of TAR&H), will be revising their residential development in Desaru, downsizing it from c.680 acres to 228 acres. That aside, UEMS will also be acquiring Somerset and Marina Walk Puteri Harbour for a total consideration sum of RM145.0m.

An encouraging move in a weak property market. We opine that management’s move in reducing development exposure in Desaru to be a positive move. UEMS is set to receive RM107.0m from the proposed settlement with TAR&H, which will be used to offset part of the purchase consideration of RM145.0m for Somerset and Marina Walk Puteri Harbour, while the remaining RM38.0m will be settled by UEMS over five years, which would have minimal strain on UEMS’ existing net gearing of 0.49x (1Q19). Based on the original development plan, UEMS would need to fork out an additional RM148.5m to settle the remaining original purchase consideration, which now can be deployed to its existing projects and land banking activities in matured areas.

Outlook. Management is still targeting RM1.2b of sales, backed by RM1.25b worth of new launches (including the new Kepong Metropolitan project, on-going projects of RM1.50b and inventories of RM1.03b (market value); but note that the bulk of new launches are in 4Q19. The group will continue its active inventory clearing efforts with a target to halve it by year-end. Divestments of non-core assets are still in the cards with RM41m worth of land deals signed and another potential RM305m worth of assets for sale this year. Net gearing is expected to drop to 0.40x by end-FY19 thanks to the divestments and remaining settlements of Aurora and Conservatory. In terms of land banking, the group is looking towards niche parcels of land with quick turnaround time span in matured areas; note that the group has acquired a small parcel of land in Mont Kiara.

No changes to earnings. Unbilled sales of RM4.11b provides close to 2-year’s visibility.

Reiterate MARKET PERFORM with a lower Target Price of RM0.835

(previously, RM0.850), as we reduced our GDV assumptions for its Desaru development due to the down scaling of the project. Our TP is based on an unchanged 81% discount (trough levels) to its FD SoP of RM4.45 (previously, RM4.52). Note that our stock universe is trading at discounts pegged to -1.0SD trough levels. While we laud the management’s effort to rationalize its high fixed cost structures and non-core assets, as well as aggressively clearing inventories, we require stronger ROE recoveries (FY19-20E: 4.9%-4.2%) or impactful sector catalysts to consider a stock re-rating.

Risks to our call include: (i) stronger/weaker-than-expected property sales, (ii) margin fluctuations, (iii) changes in real estate policies, and (iv) changes in lending environment.

Source: Kenanga Research - 17 Jun 2019

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