Highlights

• UEM Sunrise Bhd (UEMS) announced that the group entered into a share subscription agreement with UEM Group Bhd (UEMG) for the proposed issuance and allotment of 524.4m new UEMS shares.

• This represents approximately 11.6% of the existing issued and paid-up share capital of UEMS at an issue price of RM1.47 per subscription share to be satisfied in cash.

Comments

• We were surprised by the announced proposal but with a neutral to slightly positive view as it would allow UEMS to raise funds without incurring any additional borrowings and related interest expenses.

• We gather that the fund raising exercise of approximately RM770.9m is to effect the redemption (partial) of the 450m redeemable convertible preference shares issued by Bandar Nusajaya Development Sdn Bhd (BND-RCPS). The maturity date of BND-RCPS is on 27 Nov 2015.

• The shortfall between the gross proceeds raised from the proposal and the total redemption amount (assuming all BND-RCPS are redeemed is RM901.0m) will be settled via proceeds raised from a proposed disposal of a property by BND to UEMG. We understand that the related disposal would be announced by 2QFY15.

• BND is expected to contribute significantly to UEMS’ future earnings, hence the completion of this proposal would allow value accretion towards the group’s shareholders’ funds and thereby strengthen its capital position.

• Post-completion of the proposal, issued and paid-up share capital of UEM would increase to 5.1bn or RM2.5bn. The group’s net gearing would also decline, albeit marginally, to 0.24x from 0.26x (based on FY14).

Risks

• Slowdown in Nusajaya sales; failure to achieve sales target; high-beta stock.

Forecasts

• Unchanged.

Rating

HOLD

Positives

• Highly liquid proxy to property sector; large war-chest for landbank acquisitions; rich in newsflow.

Negatives

• Share price is highly news-driven; vulnerable to external slowdown; highest P/E multiple in the sector (more than 2x sector average).

Valuation

Maintain HOLD with unchanged target price of RM1.58 based on unchanged 15.1x FY15 P/E or 50% discount to RNAV).

Source: Hong Leong Investment Bank Research - 6 Apr 2015