Investment Highlights

• We maintain our HOLD recommendation on UEM Sunrise (UEMS) with a lower fair value of RM0.37/share from RM0.38/share, based on a 60% discount to its RNAV and a neutral ESG rating of 3 stars (Exhibits 4 & 5). Our lower valuation stems from a 13% increase in net debt partially offset by higher valuation for its net assets.

• UEMS’s 1QFY22 core net profit (CNP) of RM19mil came in within our expectations, making up 27% of our FY22F earnings while it accounted for 52% of consensus estimate. Thus, we make no changes to our forecast.

• YoY, the group’s 1QFY22 CNP returned to the black to RM19mil due to a 65% surge in revenue. This was mainly driven by the improvement in Malaysia’s property development revenue by 73% YoY.

• The higher revenue was also contributed by the sale of 19 industrial plots in phase 3 of the Southern Industrial and Logistics Clusters and divestment of non-strategic lands in the central and southern regions, which contributed RM165mil to revenue and RM18mil to CNP.

• UEMS is targeting to monetise non-strategic landbanks and underperforming assets in excess of RM300mil in FY22F. Hence we expect additional earnings of RM35mil (with the assumption of 11% PAT margin and RM320mil in value from the divestment) in the subsequent quarters.

• UEMS secured new sales of RM110mil (vs. RM272mil in 1QFY21), attaining a mere 7% of its FY22F sales target of RM1.5bil (Exhibit 3). This was largely driven by the sale of projects in the central region, particularly Serene Heights, KAIA Height and Allevia. These 3 projects accounted for 42% of total sales while 36% stemmed from the southern region and another 22% from other developments in the central region.

• The lower sales YoY were attributed to slower 1QFY22 launches of RM74mil vs. 1QFY21’s RM243mil, which is only 2% of its FY22 targeted launch of RM3.3bil. We may see a potential scale-back of new launches in view of the recent softening property market.

• Despite the lower sales, we expect the group’s FY22F revenue and CNP to be largely supported by unbilled sales of RM2.2bil (+16% YoY from RM1.9bil) which represented a cover ratio of 1.1 of FY22F revenue (Exhibit 3).

• Central region projects continue to be the largest contributor to unbilled sales with a 69% share. The key projects include Residensi Ava (RM482mil), Astrea (RM239mil) and Residensi Allevia (RM229mil).

• We observed a declining trend on UEMS’s inventory level, with a decline of 14% YoY and 4% QoQ to RM372mil, mainly due to higher sales of Estuari Gardens.

• QoQ, UEMS posted a PBT, driven by a stronger PBT growth from both Malaysian and overseas property development. Additionally, we saw a narrower LBT QoQ in the property investment & hotel operation segment and other segments.

• We remain cautious on the company’s short-term outlook which could take a longer time to recover from pandemic losses as compared to its peers. As UEMS is currently trading at an unexciting FY23F PE of 16x near its pre-pandemic valuation, we see limited upside potential for this stock.

Source: AmInvest Research - 26 May 2022