Investment Highlights

• We maintain HOLD recommendation on UEM Sunrise (UEMS) with an unchanged fair value (FV) of RM0.25/share based on a discount of 70% to our RNAV and a neutral ESG rating of 3-stars (Exhibits 3 & 4).

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

• UEMS has partnered with Greystar Real Estate Partners (GREP) to develop the first ‘Build-to-Rent’ (BTR) project in the inner-Melbourne suburb of Collingwood. The project, comprising of 400 units of apartment across 2 buildings, with a mix of studios plus 1-3-bedroom apartments, is expected to be completed by 2HFY27.

• The group has entered into a contract of sale and fund through agreement (FTA) with GS Collingwood Property Trust I (GS), the purchaser or investor. GS is an investment vehicle managed and controlled by a subsidiary of GREP.

• Under the contract of sale, UEMS’ wholly-owned UEM Sunrise (Collingwood) Unit Trust will dispose 1.33 acres of its land in Collingwood, Melbourne for AUD45mil (RM143mil) to GS. The disposal is expected to be completed in April 2025 with gains of AUD2mil (RM7mil) based on an original investment cost of AUD43mil.

• Meanwhile, under the FTA, UEMS’s wholly-owned UEM Sunrise (Collingwood Development) (UEMS CD) will serve as the developer to secure the project’s planning approval and appoint a builder to undertake the construction works for the project under the BTR development. Construction works will commence in Nov 2024 and are targeted to be completed by 2HFY27.

• The BTR contract is valued at AUD232mil (RM732mil). This is inclusive of consultant fees, construction costs, authority fees and development management fees. The investor, GS, will fund the construction and development costs of the project and pay progressively on a monthly basis. GS will pay directly to the appointed builder. Capital commitment from UEMS to the project and the impact on its gearing will be minimal.

• From cash flow perspective, UEMS CD is only entitled to the development management fee for managing the project throughout the development period and a fund through fee (profit element of the project or residual amount of the development after deducting all the costs) after the tentative completion date in 2HFY27.

• In view that UEMS is currently in the process of awarding the project to the builder, the profit margin and breakdown of the cost components have not been disclosed. As such, we maintain our FV as well as earnings for now.

• The contract of sale is subject to approval from the Australian Foreign Investment Review Board and no objection from the Treasurer of the Commonwealth of Australia on the proposed land sale.

• The FTA is conditional upon (i) finance approval from the lender in respect of the investor’s financial obligations on the project, (ii) procurement of new equity investor for the total payment plus purchase price less any debt finance contributions, and (iii) the date that both the investor and the developer are satisfied with the planning approval conditions.

• We are positive on the development given that the project only requires minimal capital commitment from UEMS under FTA. Besides, UEMS has no sales risk associated with the project because it is merely acting as the development manager and Greystar will be the building owner.

• As UEMS is currently trading at an unexciting FY24F PE of 14x, near its pre-pandemic valuations, we see limited upside potential at this juncture.

Source: AmInvest Research - 23 Jun 2023