• UEM Sunrise’s net profit of RM61.3m for 1QFY17 is above ours and consensus estimates making up 29% of full year estimates. The net profit for the quarter is partly lifted by gain from land sale in Johor amounting to RM11.9m.

• Property sales continued to weaken, declining by 26% yoy to RM169.4m (1QFY16: RM229.2m).

• For FY17, group is focusing on volume sales and maintaining its market position with possibility of more land divestment in order to counterbalance the rising cost from the property development side. The group intends to keep its net gearing up to a maximum of 0.65x.

• We maintain SELL. Our TP of RM1.14 based on blended valuation of PER and PBV of 12.0x and 1.2x respectively.

Earnings improved

Qoq, group’s net earnings rose 15.1% partly due to landsale and aggressive marketing programme since 2016 which helped to improve sales. We think this is part of group’s strategy to maintain its position in the market amid competition with China developers, this however came at the expense of the profit margins. Despite an uptick in net profit margin for 1Q17 by 2.8ppt qoq to 11.3%, this is due to the contribution from land sale.

Johor property outlook remains sluggish

Issues of concerns are i) earnings visibility which looks uncertain going forward, although the group expects to launch at least RM1.7bn of new projects with targeted sales of RM1.2bn for FY17, however we reckon it will be challenging for the group. For 1Q17, the group only managed to achieve 14% from their target.; ii) its inventory build ups YTD stands at RM2.4bn which suggests there will be more aggressive marketing campaigns at least until 2018; iii) despite total unbilled sales of RM4.1bn, bulk of these comes from Australia project making up 65%; and iv) the impending higher net gearing due to higher cost to be incurred from Australia’s projects. Management expects to counter this cost by divesting more land in Nusajaya. Our revenue growth projected included landsales which in our view is not a sustainable in the long run.

We maintain our SELL call with a TP of RM1.15 based on blended valuation of PER and PBV of 12.0x and 1.2x respectively. Fundamentally, the group has huge land bank reserve of 10,679 acres of which 73% is located in Nusajaya. However, we do not expect conditions to turn favourable in the near to mid-term.

Source: BIMB Securities Research - 18 May 2017