Investment Highlights

• We maintain HOLD recommendation on UEM Sunrise (UEMS) with a higher fair value (FV) of RM0.60 (from RM0.46/share previously) based on a discount of 50% to our revised RNAV and a neutral ESG rating of 3-stars (Exhibits 4 & 5).

• We take the opportunity to raise our FV to reflect faster progress billings with the anticipation of accelerated property launches in Johor post-FY25, driven by the positive shift in sentiments (completion of the Singapore-Johor Bahru Rapid Transit System, potential revival of Kuala Lumpur-Singapore high-speed rail and establishment of a special financial zone in Iskandar Malaysia) within the Johor property market, especially in Iskandar Puteri.

• Additionally, we have factored in a lower beta in our discount rate used for our net present value calculation to account for improved sentiments in the Malaysian property market. We also include contribution from the newly-acquired Perth land into our RNAV calculation.

• The revised FV implies an FY24F PE of 30x, 1 standard deviation above its pre-pandemic valuations.

• UEM Sunrise (Subiaco East) Pty Ltd entered into a contract of sale (COS) with DevelopmentWA to acquire 2 parcels of land totaling 1.22 acres at The Oval, Subiaco East, Perth in Western Australia for AUD22mil or RM66mil, based on exchange rate of AUD/MYR 2.99 as at 14 Aug 2023 (Exhibit 1).

• The final acquisition price is expected to be AUD24mil (RM73mil) after taking into account the 10% goods and service tax.

• The buyer, UEM Sunrise (Subiaco East) Pty Ltd operates as the trustee for UEM Sunrise (Subiaco East) Unit Trust, both of which are indirect wholly-owned subsidiaries of UEMS.

• The vendor, DevelopmentWA serves as the central land and development agency of the Western Australia state government, entrusted to lead and oversee the Subiaco East redevelopment.

• Upon completion of the acquisition in 1QFY25, UEMS’ accumulated landbank will expand marginally by 0.01% to 8,534 acres. Meanwhile, its remaining gross development value (GDV) will grow by 1% to RM108bil.

• Upon the signing of the COS yesterday, UEMS has paid a deposit of 10% to DevelopmentWA. The remaining 90% of the acquisition cost is projected to be fully settled in 1QFY25.

• We expect the group’s FY25F gearing ratio to rise to 0.51x from 0.50x assuming the acquisition is fully funded by debt.

• Hence, we lower FY23F-25F core net profits by 0.2%/0.4%/3% to factor in increased finance cost from additional borrowings to acquire the Perth land.

• Based on preliminary plans that are subjected to development approval, the project will be a mixed-use residential development featuring sleek dual towers, comprising a total of 430 apartments. Additionally, UEMS has designated 12% of the units for affordable housing.

• The project will be Green Star Buildings certified and is expected to generate an estimated GDV of AUD450mil (RM1.3bil).

• The project details (including layout, pricing and size) have yet to be finalised. Nevertheless, we expect it to be targeting higher-end buyers with an estimated average selling price of AUD1mil, derived from the project’s GDV and number of units.

• The construction is scheduled to commence in FY26 with completion targeted by FY29. We estimate a negligible FY26F contribution with a gradual increase to 16% of UEMS earnings by FY27F-FY28F.
   
• The Acquisition Price of AUD24mil (AUD459 Psf) Implies a Low Land Cost-to-GDV Ratio of 5%.
   
• While there were not many identical transactions within Subiaco recently, the asking price for residential lands within 5km radius of the subject lands range from AUD300-AUD350 psf. Hence, we deem the acquisition price of AUD459 psf to be reasonable considering its proximity to Perth’s central business district (3km), direct frontage to Subiaco Oval stadium, and location that is less than 1km from Bob Hawke College (Exhibit 2).

• UEMS will be responsible for the development of the land in alignment with design guidelines and policies outlined in the Subiaco East redevelopment masterplan. The design guidelines cover elements including building design and materials, building heights, heritage preservation and car parking. The approved design guidelines permit a maximum height of 30 storeys for one parcel of the acquired land (Land 1) and 11 storeys for another one (Land 2).

• Hence, we anticipate UEMS to incur additional costs, particularly on the apartments’ exterior designs and infrastructure. Nevertheless, the lower land cost-to-GDV provides room for UEMS to accommodate additional costs for infrastructural work.

• Overall, we are positive on the acquisition which will further strengthen UEMS’ portfolio in the Australian market following the group’s success in Melbourne, Australia.

• However, UEMS is currently trading at an unexciting FY24F PE of 29x, higher than its pre-pandemic valuations of 23x. Hence, we see limited upside potential at this juncture.

Source: AmInvest Research - 16 Aug 2023