Investment Highlights

• We maintain our HOLD recommendation on UEM Sunrise (UEMS) with a lower fair value of RM0.35/share from RM0.37/share, based on a 60% discount to its RNAV and a neutral ESG rating of 3 stars (Exhibits 5 & 6). Our RNAV calculation is now lower after imputing a drop in valuation for the group’s net tangible assets and a 0.5% increase in net debt.

• UEMS’s 1HFY22 core net profit (CNP) of RM40mil came in slightly above our expectations, making up 56% of our FY22F earnings while accounting for 118% of consensus estimate. We make no changes to our forecast on expectations that earnings contribution from land sales in 2HFY22 will be lower compared to 1HFY22.

• YoY, the group’s 1HFY22 CNP returned to the black to RM40mil due to a 56% increase in revenue. This was mainly driven by a 63% YoY escalation in Malaysian property development’s 1HFY22 revenue.

• The higher sales were attributed to higher progress billing and better construction progress from local projects, coupled with the recognition of sales of 19 industrial plots in Southern Industrial and Logistics Clusters in Iskandar Puteri, Johor and other non-strategic land. Land sales contributed 30% to its 1HFY22 total revenue. Driven by land sales with higher profit margin, the domestic property development’s PBT surged 2.5x YoY.

• The higher revenue was also contributed by its inventory monetisation efforts. We observe a declining trend on UEMS’s inventory level, which dropped by 31% YoY and 26% QoQ to RM276mil (Exhibit 4), primarily due to higher sales of its completed inventories in Johor, namely Estuari Gardens, Aspira LakeHomes and Teega.

• UEMS secured new sales of RM439mil (vs. RM707mil in 1HFY21), attaining a mere 29% of its FY22F sales target of RM1.5bil (Exhibit 3). Ongoing projects made up 59% of sales, while the remaining sales came from completed inventories (39%) and new launches (2%).

• Geographically, 57% of the new sales were contributed by projects in the central region, particularly KAIA Height (14%), Residensi Allevia (12%) and Serene Heights (11%). Southern region accounted for 39% of the sales, mainly from Estuari Gardens (12%), Aspira LakeHomes (8%) and Teega (7%). The remaining 4% was contributed by sales of properties from the Conservatory in Melbourne, Australia.

• Despite lower sales in 1HFY22, we expect the group’s FY22F revenue and CNP to be largely supported by unbilled sales of RM2.3bil (+15% YoY from RM2bil) which represent a cover ratio of 1.1x of FY22F revenue (Exhibit 3).

• Central region projects continued to be the largest contributor to unbilled sales with a share of 71%. The key projects include Residensi Ava (22%), Residensi Allevia (11%) and Astrea (10%). The remaining contributors to unbilled sales came from the southern region projects (26%) and Australian projects (3%).

• UEMS’s 1HFY22 launches of RM100mil (vs. RM300mil in 1HFY21) were only 3% of its FY22F targeted launch of RM3.3bil. Nevertheless, UEMS is seeking to ramp up its new launches in 2HFY22, with the launch of 3 major projects, including KAIA Heights Phase 2 (Block C & D), Collingwood in Melbourne and MK31 in Mont’Kiara with a total estimated gross development value (GDV) ranging from RM2bil to RM2.6bil. This is expected to largely support its FY22F sales target of RM1.5bil in addition to the sales of ongoing projects.

• QoQ, UEMS posted a 10% decline in PBT, mainly driven by weaker performance from its property development. This was primarily due to lower land sales of RM51mil in 2QFY22 vs. RM158mil in 1QFY22.

• As UEMS is currently trading at an unexciting FY23F PE of 15x near its pre-pandemic valuation, we see limited upside potential in this stock.

Source: AmInvest Research - 25 Aug 2022