Investment Highlights

• We maintain our HOLD recommendation on UEM Sunrise (UEMS) with an unchanged fair value (FV) of RM0.25/share following the termination of the purchase of Jalan Sultan Yahya Petra land (Semarak land).

• Our FV is based on a 70% discount to its RNAV and a neutral ESG rating of 3 stars (Exhibits 4 & 5). This implies an FY24F PE of 12x, at parity to the average of larger cap property stocks.

• Semarak land’s estimated gross development value (GDV) of RM1.5bil accounted for only 1% of UEMS’s total remaining GDV of RM107bil (pre-exclusion). Hence, the removal of the land from our RNAV is immaterial to our valuation.

• While maintaining FY22F/FY23F earnings, we lower our FY24F core net profit by 1% to exclude the contribution from Semarak land.

• On August 2022, UEMS entered into a sales and purchase agreement (SPA) with Nipponkey to acquire Semarak land for RM384mil.

• However, UEMS’s intention to acquire Semarak land has fallen through after the conditions precedent (CP) under the SPA were not fulfilled within the conditional period, which expired on 7 February 2023.

• The unfulfilled CPs involved the delay in authorities’ approval of the disposal of lands to Nipponkey as part of the settlement of the purchase price (Exhibits 2, 3).

• Consequently, UEMS decided not to proceed with the acquisition to avoid the lengthy approval process, which may interfere with its upcoming planned launches and capital efficiency.

• With the lapse of SPA, Nipponkey shall refund the deposit of RM38mil, as well as any interest accrued to UEMS within 14 days.

• The SPA shall be terminated and be of no further effect. Neither party shall have any claims against the other except for any antecedent breach.

• In our view, Semarak land’s land cost-to-GDV ratio of 26% is unattractive as compared to the industry average range of 15%-20%. UEMS could generate a better profit margin by channeling the funds to acquire other lands with more attractive pricing and faster turnaround potential.

• As UEMS is currently trading at an unexciting FY24F PE of 12x near its pre-pandemic valuations, and we see limited upside potential at this juncture.

Source: AmInvest Research - 9 Feb 2023