Investment Highlights

• We maintain HOLD recommendation on UEM Sunrise (UEMS) with a higher fair value (FV) of RM0.99/share (from RM0.77/share previously) based on a 40% discount to our revised RNAV and a neutral ESG rating of 3 stars . The FV implies FY25F P/E of 45x, 1 standard deviation above its 2017-2018 median.

• Despite the premium valuation, we believe UEMS’s share price will be supported by improving sentiments in the Johor property market, driven by potential infrastructural developments, including Kuala Lumpur-Singapore high- speed rail and Johor light rail transit.

• UEMS’ FY23 core net profit (CNP) of RM75mil came in below expectations. It was 11% below our earlier forecast and 7% below street’s.

• The variance to our forecast was mainly due to lower-than- expected revenue as a result of slower-than-expected revenue recognition from land sales.

• Nevertheless, we maintain our FY24F-FY25F earnings in view of improvements in progress billing from FY24F onwards, driven by the contributions from increased new launches in FY23.

• Additionally, UEMS targets to complete and deliver 6 projects in FY24F, namely Residensi Ava, Residensi Allevia, KAIA Heights, Serene Square, Senadi Square and Aspira Gardens Phase 2.

• We expect the group’s FY24F revenue and CNP to be further supported from the full recognition of unbilled sales generated by the completion of these 6 projects as well as the potential recognition of land sale ranging from RM161mil-RM307mil, contingent upon the progress of the land disposal process.

• YoY, the group’s FY23 revenue declined by 9%, mainly attributed to higher completion of projects in FY22, coupled with lower contribution from land sales in FY23, which totaled RM277mil vs. RM307mil in FY22. However, its CNP inched up 0.6% YoY as a result of higher interest income and greater cost savings.

• In FY23, UEMS secured new sales of RM2.1bil (2.4x YoY), exceeding its earlier target of RM1.5bil . The main sales contributors were newly launched projects, namely The MINH (19%) and The Connaught One (10%) as well as the en bloc sales of its Collingwood project (41%).

• Meanwhile, UEMS’ FY23 launches of RM3.6bil (7x YoY) have surpassed its earlier target of RM2.5bil. The key launches were The MINH (27%), Collingwood (24%), The Connaught One (21%) and Residensi Zig (20%).

• The stronger-than-expected sales and launches were attributed to the recognition of en bloc sales of its Collingwood project valued at RM874mil. To recap, UEMS disposed its 1.33 acres of land in Collingwood to Greystar Real Estate Partners and UEMS will serve as the developer for the project. The maiden contribution from the Collingwood project is expected to kick in in FY25F.

• For FY24F, management is setting a lower sales target of RM1bil (-21% vs. actual FY23 sales, excluding Collingwood project). The target is supported by FY24F planned launches of RM835mil , with 71% of the launches slated for the southern region and the remaining 29% for the central region.

• QoQ, UEMS’s CNP surged 4.5x while revenue rose 35%. This was primarily due to higher recognition of 4QFY23 land sales of RM150mil vs. RM40mil in 3QFY23. The increased portion of land sales, which typically yield higher margin, subsequently boosted CNP margin to 7.2% in 4QFY23 from 2.2% in 3QFY23.

• Overall, UEM’s unbilled sales of RM2.7bil (flattish QoQ) represents a comfortable cover ratio of 1.7x of FY24F revenue .

• UEMS also announced the revision of its dividend policy, with a higher payout ratio of 40%-60% of the group’s consolidated profit after tax and non-controlling interests from 20%-40% previously.

• UEMS is currently trading at an unexciting FY25F PE of 47x, higher than its 2017-2018 median of 38x. Hence, we see limited upside potential at this juncture.

Source: AmInvest Research - 28 Feb 2024