Investment Highlights

• We maintain HOLD recommendation on UEM Sunrise (UEMS) with a higher fair value (FV) of RM0.46 (from RM0.25/share previously) based on a lower discount of 50% (from 70% previously) to our revised RNAV and a neutral ESG rating of 3-stars (Exhibits 5 & 6).

• The higher FV is mainly driven by the lower discount rate, which results from improving sentiments in Johor property market, particularly in Iskandar Puteri. The revised discount rate of 50% to our RNAV is similar to the discount which UEMS’ share price traded in FY19 (pre-pandemic). Additionally, the revised RNAV is partially underpinned by the upward adjustment of the market price for UEMS’ lands in Iskandar Puteri.

• The FV also implies an FY24F PE of 23x, at parity to its prepandemic valuations.

• Recent developments have unveiled potential catalysts that may drive higher demand for properties in Johor, including: (i) the completion of the Singapore-Johor Bahru Rapid Transit System (RTS Link) in FY26, (ii) the potential revival of Kuala Lumpur-Singapore high-speed rail (HSR), (iii) the establishment of a special financial zone in Iskandar Malaysia, and (iv) the potential relaxation of the conditions for the Malaysia My Second Home (MM2H) program.

• We believe UEMS, being a major landowner as well as the master developer of Iskandar Puteri will be the primary beneficiary of the positive newsflow on Johor recently. As at 31 March 2023, Iskandar Puteri constitutes 5,179 acres or 61% of UEMS’s total land bank and RM58bil or 55% of UEMS’s total remaining GDV.

• Nevertheless, we maintain our earnings forecast given the longer gestation time for the positive developments to materialise and be reflected in UEMS’ new sales and launches.

• As at June 2023, the RTS Link was 41% completed and is on track for full completion by the end of 2026. The RTS Link connects the Singapore terminus at Woodlands North with the Malaysian terminus at Bukit Chagar near Johor Bahru Sentral (JBS) (Exhibit 1).

• Currently, Malaysians travelling to Singapore using public transport have to take 2 rounds of bus, one from JBS to Singapore Customs, and another from Singapore Customs to Woodlands Mass Rapid Transit (MRT) station.

• However, with the completion of the RTS Link, we anticipate a substantial reduction in travel time, with commuting between Malaysia and Singapore taking only 5 minutes from the current 30-40 minutes journey during non-peak hours.

• The improved connectivity is anticipated to raise interest among Malaysians working in Singapore to consider purchasing property in Johor, including Iskandar Puteri (24 minutes’ driving distance from Bukit Chagar station).

• Secondly, Malaysian government is now seeking to revive the HSR project following the termination of the project in 2021. The government-owned MyHSR Corporation has invited private firms to submit concept proposals for the HSR project. The closing date for the submission is 15 November 2023.

• Although there is no indication of any realignment of the station, we anticipate that the proposed station location within Iskandar Puteri to remain unchanged given its close proximity to Jurong East station in Singapore. It is important to note that in 2015, the Singapore government acquired land parcels in Jurong East for the HSR station and mixed-use development. Considering the significant costs associated with any changes, it is unlikely for the Singapore government to alter its previously proposed station location in Jurong East.

• This improved connectivity between Iskandar Puteri and Singapore is expected to drive the economic growth in both regions and thus enhance the appeal for Malaysian and foreigners to reside in Iskandar Puteri considering that the house prices are more affordable than Singapore. Hence, UEMS will have the opportunity to launch highermargin luxury houses with prices of >RM1mil in the future, capitalising on the potential increase in interest from foreigners in the Johor property market.

• Thirdly, Malaysian Government has unveiled plans to establish a special financial zone (SFZ) in Iskandar Malaysia. This will provide eligible companies and individuals with various benefits, including a lower tax rate of 15% (instead of the standard 30% rate) for knowledge workers.

• Meanwhile, UEMS’ parent company, UEM Group, has recently signed a memorandum of understanding to develop a gigawatt hybrid solar photovoltaic power plant integrated with a renewable energy (RE) industrial park in Johor. While the precise location and details of the park have yet to be disclosed, it is highly probable that the site will be located within Iskandar Puteri given that UEMS’ 70%-owned subsidiary holds substantial land banks in that region.

• These initiatives are expected to stimulate economic activities in Iskandar Puteri, leading to a surge in demand for residential, commercial and industrial properties in the region. Given UEMS’ substantial landbank at a comparatively lower cost (average land cost of RM11.67 psf), we believe UEMS will be the primary beneficiary, experiencing an upswing in properties demand and prices.

• As a part of the Madani economic framework, Malaysian government is currently reviewing and considering relaxing the conditions for the MM2H program. The potential positive revisions are expected to attract a larger number of foreign property purchasers and address overhang issues in Malaysia, particularly in Kuala Lumpur, Johor and Penang, which have been popular destinations for foreigners seeking to reside in the country.

• UEMS' inventory level is relatively low at RM176mil, representing 11% of its FY23F revenue. Out of this inventory, RM131mil or 75% of the completed inventories come from the Southern region, particularly in Johor. The major components of its completed inventories are the luxury landed residential properties with a price >RM1mil, including Emerald Bay and Estuari Gardens in Puteri Harbour. We believe the potential relaxation of MM2H requirement could serve as catalyst to help clear UEMS’ inventories, particularly the luxury residential properties.

• Furthermore, in the latest round of property cooling measures, Singapore has doubled additional buyer’s stamp duties (ABSD) rate for foreign buyers to 60%, up from the previous 30% (Exhibit 3). Additionally, rental rates in Singapore have surged to their highest level in 1Q2023 (Exhibit 4). These factors may make property purchases in Johor more appealing compared to Singapore, potentially leading some expatriates to contemplate relocating from Singapore.

• Nevertheless, we believe it may take some time for the spillover effects of the developments to materialise. Meanwhile, UEMS is currently trading at an unexciting FY24F PE of 26x, higher than its pre-pandemic valuations of 23x. Hence, we see limited upside potential at this juncture.

Source: AmInvest Research - 8 Aug 2023