Investment Highlights

• We maintain our HOLD recommendation on UEM Sunrise (UEMS) with an unchanged fair value of RM0.37/share, based on a 60% discount to its RNAV and a neutral ESG rating of 3 stars (Exhibits 2 & 3).
• While maintaining our FY22F–23F earnings, we raise FY24F core net profit by 3% to factor in the earnings contribution from the new project from the Jalan Sultan Yahya Petra land, which is targeted for launching in FY24. The project is expected to contribute up to 10% of UEMS’ earnings from FY25F to FY27F over a development period of 4 years.
• UEMS held a briefing last Friday to shed more light on its recently announced RM384mil acquisition of a 6.4- acre land on Jalan Sultan Yahya Petra, in Kuala Lumpur. Here are the key takeaways:
  (i) The land comes with a development order (DO) for a mixed commercial development which comprises shopping complex, office, hotel and serviced apartments (Exhibit 1). We anticipate that there will be some degree of modification on the DO to upsize the residential units while downsizing commercial and retail properties. Nevertheless, the decision will only be made closer to the launching date of the project based on the most recent market trend and dynamics.
  (ii) The residential units are expected to be priced between RM900 and RM1,100 per square foot (psf). As a result of the high price psf, we anticipate that UEMS will offer small to mid-sized residential units under the project for an absolute pricing that is affordable to buyers. These products are primarily aimed at city dwellers seeking convenience as well as preferring a lifestyle that comes with living in the heart of KL.
  (iii) The land in Jalan Sultan Yahya Petra is valued at RM189 per plot ratio. In comparison to other land transactions in Kuala Lumpur (without DO), the price per ratio ranges from RM200 to RM220 per plot ratio. Hence the price is deemed reasonable given its size and strategic location, as well as a readily available set of plans to commence development.
  (iv) The agreement includes a condition where the vendor, Nipponkey, has to settle fees associated with the land DO to Dewan Bandaraya Kuala Lumpur (DBKL), including development charges of RM25mil, improvement service fund contribution of RM0.7mil plus any outstanding charge and late payment penalty. The risk of nonpayment is minimal because the fees were already factored into the purchase price. The 10% deposit amounting to RM38mil will be paid to Nipponkey within 6 months from date of transaction and this covers the entire fees owed to DBKL.
• Recall that UEMS is targeting to monetize its non-strategic landbanks and underperforming assets in excess of RM300mil in FY22F. We believe the impact of the land acquisition to its gearing ratio will be minimal as it will be funded by the proceeds from disposal of lands. Hence we maintain our FY22F–24F forecasts for gearing ratio and finance cost.
• As UEMS is currently trading at an unexciting FY23F PE of 15x near its pre-pandemic FY18-FY19 average, we see limited upside potential for this stock.

Source: AmInvest Research - 8 Aug 2022