Investment Highlights

• We maintain HOLD recommendation on UEM Sunrise (UEMS) with an unchanged fair value (FV) of RM0.60 based on a discount of 50% to our RNAV and a neutral ESG rating of 3-star (Exhibits 6 & 7). The FV implies FY24F P/E of 30x, 1 standard deviation above its pre-pandemic 2018-2019 median.

• UEMS’s 50%-owned subsidiary, Mega Legacy entered into a sale and purchase agreement (SPA) with Melati Ehsan Holdings’ wholly-owned Pembinaan Kery (PKSB) to dispose a 4-acre land in Kiara Bay, Kepong for RM85mil (Exhibits 1 & 4).

• Meanwhile, Mega Legacy also entered into a development rights agreement (DRA) with the land buyer, PKSB to develop the disposed land. Mega Legacy will be responsible for marketing and selling the completed property units developed on this land.

• To recap, Mega Legacy is the master developer of Kiara Bay. The proposed DRA grants a degree of control over the development of the land to UEMS even though Mega Legacy is no longer the landowner.

• The DRA is put in place to ensure that the development of the land aligns with Kiara Bay’s current conceptual and development master plan.

• The development rights are valued at either (i) RM93.5mil; or (b) aggregate of land purchase price of RM85mil plus PKSB’s entitlement to 20% of the project profit, whichever amount is higher.

• The purpose of these 2 arrangements enables Mega Legacy to repay its debt obligations and allocate a portion of the proceeds as working capital for the launch of the upcoming project, Residensi ZIG.

• Upon the completion of the disposal in 1HFY24, Mega Legacy will receive the full payment of RM85mil (Exhibit 3).

• However, the first payment of the development rights value to PKSB will only take place after the official launch of the project on the subject land, while the final payment will be made upon the completion of the project (Exhibit 5).

• This timing gap between proceeds from land disposal and payment of the development rights value provides Mega Legacy with sufficient time to arrange and manage its cash flow commitments.

• Given UEMS's plan to launch Residensi ZIG with a gross development value of RM646mil in Kiara Bay by 3QFY23, we expect that new launches on the subject land will not happen in the near term to facilitate better cash flow management.

• The disposal price of RM85mil is equivalent to its market value, as ascribed by the independent valuer, Rahim & Co.

• We are neutral on the arrangements which primarily involve cash flow management of Mega Legacy and have minimal impact on UEMS’ earnings. Hence, we have made no changes to our earnings forecast.

• UEMS is currently trading at an unexciting FY24F P/E of 36x, higher than its pre-pandemic 2018-2019 median of 23x. Hence, we see limited upside potential at this juncture.

Source: AmInvest Research - 12 Sept 2023