Investment Highlights

• We maintain HOLD recommendation on UEM Sunrise (UEMS) with an unchanged fair value (FV) of RM0.25/share given the negligible contribution to our RNAV calculation from the newly acquired Kelana Jaya land. Our FV is based on a discount of 70% to our RNAV and a neutral ESG rating of 3- stars (Exhibits 2 & 3).

• The FV implies a FY24F PE of 13x, at parity to the average of larger cap property stocks currently.

• UEMS’s indirect wholly-owned Sunrise Innovations entered into a sale and purchase agreement with Employees Provident Fund (EPF) wholly-owned subsidiary’s Kwasa Properties to purchase a 9-acre freehold land situated at Bandar Petaling Jaya, Selangor for RM155mil.

• While maintaining our FY23F/FY24F earnings, we raise FY25F core net profit by 1% to factor in earnings contribution from the new project.

• The proposed acquisition is expected to be completed in 1HFY24. We assume that the acquisition to be mainly funded internally. UEMS’s has cash balances of RM1.1bil as at 31 March 2023. Post-acquisition, we expect the group’s FY24F net gearing ratio to increase slightly to 0.51x from 0.48x.

• We deem the Kelana Jaya land to be reasonably priced after comparing UEMS’s previous purchase of Dutch Lady Petaling Jaya factory land, which was priced at RM462 psf, and Sunway’s acquisition of 17-acre land in Kelana Jaya at RM386 psf in 2015.

• UEMS plans to develop a mixed-use development featuring residential and retail components with an indicative gross development value (GDV) of RM1.1bil.

• The acquisition price translates to RM393 psf and implies a cost-to-GDV ratio of 14%, which is slightly below the industry’s average land cost-to-GDV ratio of 15%–20%.

• As the project is scheduled to debut in FY25F, we estimate a negligible contribution in FY25F with a gradual increase to 10% of UEMS’s earnings by FY29F.

• The project is categorised in the NEST Series under UEMS’s Happy+ product series. NEST series is focused on multigenerational-oriented homes designed with the customers’ extended families in mind. To cater for the family needs, we anticipate the built-up of the project to be comparable to UEMS’s ongoing NEST series projects, which ranges in size from 700 sqft to 1,400 sqft (Exhibit 1).

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  We expect the average selling price for its residential unit to be >RM700 psf given its prime location with great amenities. For reference, the newly developed and launched serviced apartments in Kelana Jaya, such as Plaza @ Kelana Jaya, Panorama Residences and The Arcuz are priced between RM700-RM900 psf.

• The land is free from any encumbrance except for the tenancy granted by Kwasa Properties to GCH Retail (Malaysia) expiring on 16 December 2023. Nevertheless, we expect the tenant to relocate prior to the completion of acquisition as GCH Retail has not given any notice to renew the tenancy.

• Overall, we are positive on the acquisition which will further strengthen UEMS’ portfolio in prime and upmarket locations following the group’s success in Mont Kiara.

• As UEMS is currently trading at an unexciting FY24F PE of 13x, near its pre-pandemic valuations, we see limited upside potential at this juncture.

Source: AmInvest Research - 7 Jun 2023