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.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....