Investment Highlights

• We maintain our HOLD recommendation on UEM Sunrise (UEMS) with a lower fair value of RM0.25/share from RM0.35/share, based on a higher discount rate of 70% (from 60% previously) to our revised RNAV and a neutral ESG rating of 3 stars (Exhibits 5 & 6).

• Our higher discount rate is to reflect increasing challenges on the sales prospects of UEMS’ properties that are largely priced above the affordable segment as well as uncertainties in the timing of new launches.

• Even so, UEMS’s 9MFY22 core net profit (CNP) of RM61mil came in above our expectations, making up 86% of our FY22F earnings while accounting for 129% of consensus estimate.

• Hence, we raise our FY22F/FY23F/FY24F CNP by 23%/6%/4%. This is after taking into account a stronger share of results from joint ventures, which are mainly contributed by Horizon Hills in Iskandar Puteri and Forest Heights in Seremban.

• YoY, the group’s 9MFY22 CNP returned to the black to RM61mil due to a 59% increase in revenue. This was mainly driven by a 61% YoY surge in the Malaysian property development’s 9MFY22 revenue.

• The higher sales were attributed to higher progress billings and improved construction progress works 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 22% to its 9MFY22 total revenue. Driven by land sales with higher profit margin, the domestic property development’s PBT climbed by 3.8x YoY.

• The higher revenue was also contributed by its inventory monetisation efforts. We observed a declining trend on UEMS’s inventory level, which dropped by 47% YoY and 18% QoQ (Exhibit 4), primarily due to higher sales of its completed inventories in Johor, particularly the Estuari Gardens.

• In 9MFY22, UEMS secured new sales of RM736mil (-20% YoY), attaining a mere 49% of its FY22F sales target of RM1.5bil (Exhibit 3). Ongoing projects made up 52% of sales, while remaining sales came from completed inventories (40%) and new launches (8%).

• Geographically, 51% of the new sales were contributed by projects in the central region, particularly Residensi Allevia (15%), KAIA Height (12%) and Serene Heights (7%). Southern region accounted for 44% of the sales, mainly from Estuari Gardens (15%), Teega (7%) and Aspira LakeHomes (6%). The remaining 5% was contributed by sales of properties from the Conservatory in Melbourne, Australia.

• Despite lower sales in 9MFY22, we expect the group’s FY22F revenue and CNP to be largely supported by unbilled sales of RM2.2bil, 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 72%. The key projects include Residensi Ava (22%), Residensi Allevia (13%) and Astrea (19%). The remaining contributors to unbilled sales are the southern region projects (26%) and Australian projects (3%).

• UEMS’ 9MFY22 launches of RM517mil (vs. RM550mil in 9MFY21) were only 16% of its FY22F targeted launch of RM3.3bil. Given the delay in obtaining authority approvals for planned launches of its key projects, including The Minh (GDV: RM950mil) and The Connaught One (GDV: RM740mil), UEMS intends to push the launches of these 2 projects to 1HFY23. As such, we view that it would be challenging for UEMS to meet its FY22F sales and launch targets.

• QoQ, UEMS posted a 3% decline in revenue, primarily due to lower sales of RM297mil in 3QFY22 vs. RM329mil in 2QFY22. However, we see a 5% improvement in CNP, mainly driven by lower effective tax rate due to utilisation of tax losses.

• As UEMS is currently trading at an unexciting FY23F PE of 10x near its pre-pandemic valuations, and we see limited upside potential at this juncture.

Source: AmInvest Research - 24 Nov 2022