Investment Highlights

• We maintain HOLD recommendation on UEM Sunrise (UEMS) with an unchanged fair value (FV) of RM0.77 based on a 40% discount to our RNAV and a neutral ESG rating of 3-star (Exhibits 4 & 5). The FV implies FY24F P/E of 30x, 1 standard deviation above its pre-pandemic 2018-2019 median.

• UEMS’ wholly-owned Nusajaya Rise, Symphony Hills and Nusajaya Heights have collectively entered into 8 sales and purchase agreements to dispose freehold lands totalling 116 acres in Mukim Tanjung Kupang and Mukim Pulai in Johor Bahru to Paragon Globe’s wholly-owned PGB Landmark for RM146mil cash (Exhibits 1-2).

• Upon completion of the disposal in FY25, we expect the group’s net gearing ratio to improve to 0.47x from 0.49x. Meanwhile, UEMS’ total remaining landbank will drop marginally by 1% to 8,106 acres.

• We slightly raise FY23F/FY24F/FY25F core net profit (CNP) by 0.1%/0.6%/5% to factor in lower interest expense with the group’s borrowings expected to be reduced from the disposal proceeds of the lands.

• The disposal price is at a 2.6% discount to the indicative market value of RM150mil by independent valuer, CBRE WTW Valuation & Advisory.

• Based on our channel checks, the asking price for surrounding agriculture lands ranges from RM30 psf to RM40 psf. Nevertheless, we deem that the disposal price at RM29 psf to be reasonable given the huge size of the disposed lands.

• Based on UEMS’ 2022 annual report, the average net book value of lands in Iskandar Puteri is RM12 psf. Hence, we estimate the gain on land disposal at RM87mil or 60% of the sales proceeds.

• The buyer, Paragon Globe plans to develop industrial properties, including factories and a dormitory on the subject lands.

• We are positive on the disposal as UEMS can capitalise on the economic activities arising from Paragon Globe’s proposed industrial development. This disposal enables UEMS to focus on launching more residential development projects in Johor.

• Nevertheless, UEMS is currently trading at an unexciting FY24F PE of 40x, higher than its pre-pandemic 2018-2019 median of 23x. Hence, we see limited upside potential at this juncture.

Source: AmInvest Research - 20 Nov 2023