Investment Highlights

• We maintain HOLD on UEM Sunrise (UEMS) and its fair value of RM0.43/share based on a 60% discount to its RNAV with a neutral ESG rating of 3 stars (Exhibits 1 & 2).

• Our RNAV has been marginally raised by 0.2% or RM13mil to RM5.4bil from the estimated gains arising from UEMS’ conditional agreement to sell 3 parcels of freehold agriculture land measuring 431.1 acres in Mersing, Johor Bahru for RM45.1mil cash to Lagenda Properties’ 70%-owned Lagenda Mersing Sdn Bhd.

• Our core earnings forecasts are unchanged for now pending the completion of the deal with the major portion of sale proceeds expected to be received over the next 10 months. As we understand that the land sale could generate a pretax margin of 40%, we estimate that the net gain of RM13mil could raise our FY22F net profit by 15%.

• At about RM2.40 per sq ft (psf), the price tag appears to be consistent with the asking price range of between RM3.00 and RM6.50 psf for land parcels up for sale in the same area based on our research (asking prices are generally higher than actual transacted prices).

• The land parcels, registered for agricultural use, are 145km away from UEMS’ Iskandar Puteri township, and over 2 hours of driving to reach Johor Bahru city centre. Accessibility is also limited currently without nearby major highways.

• In our view, there is a possibility that the group would be using the proceeds for landbanking activities and repay borrowings, which could slightly improve FY22F net gearing from 44% to 43%.

• We are positive on this development which would accelerate the monetisation of its remaining undeveloped landbank in Johor Bahru while allowing the group to focus on existing projects with better market prospects, in line with its cost rationalisation initiatives for better operational efficiency.

• Upon the completion of the disposal, the group’s total remaining undeveloped landbank will contract by 16% to 2,245 acres from 2,677 acres as at 30 April 2021. There are 23 ongoing projects, of which 70% are based in Johor Bahru.

• Meanwhile, the company’s short-term outlook remains uncertain as longer movement restrictions together with newly implemented EMCO in selected districts could lead to slower-than-expected earnings recovery from its 1QFY21 loss of RM4mil.

• Currently, UEMS’ valuation is excessive at FY22F PE of 22x vs. an average FY22F PE of 14x for property stocks under our coverage.

Source: AmInvest Research - 5 Jul 2021