UEMS proposed acquisitions 72.7 acres of leasehold lands in Kepong for RM279.3m, to be funded via internal generated fund. The GDV of the development is estimated at RM15bn to be development over the next 15 years. We are positive on the proposal as the estimated NPV (assuming 14% margin) of the project will increase our RNAV by 3 sen per share and implied land cost of RM88.2 psf is very competitive at only 3.7% of total GDV. Net gearing may inch up to 0.52x (from 0.48x). We impute the contribution from the above development (expected from FY20 onwards) and introduce our FY20 forecast. We also lower our FY18e and FY19f earnings forecast by 8.0% and 25.4% after revisit our forecast assumptions. Maintain our HOLD rating with our RNAV based TP (60% discount) of RM1.20 (raised from RM1.18).

NEWSBREAK

UEMS proposed acquisitions of 72.73 acres of leasehold lands in Kepong via share subscription of (50%+1) in Mega Legacy Sdn Bhd (MLM) for RM279.3m. MLM will develop a mixed residential and commercial development on the lands with an estimated GDV of RM15bn over the next 15 years. The maiden launch is targeted in FY19. The acquisitions will be funded via internal generated funds.

HLIB’s VIEW

Positive on the proposal as it is expected to increase the group’s effective GDV by 6.9% to circa RM117bn. Assuming an EBIT margin of 14%, the project’s NPV is estimated at RM112.7m or RNAV of 3 sen per share (0.9% of our TP). Note that UEMS will consolidate the results of MLM given that it owns a controlling stake. Net gearing may inch up to 0.52x from the current level of 0.48x.

Low land cost. The implied land cost to UEMS is circa RM88.2 psf and is very competitive at only 3.7% of the estimated GDV. However, it does not include the construction cost of the two interchanges connecting to MRR2 as stiputed in the Development Order. The allowable plot ratio on the land is 1:6.

Sizeable land in mature location. The lands are located adjacent to the Kepong Metropolitan Park, approximately 13km north west of Kuala Lumpur City Centre. They are currently accessible via Jalan Kepong and two new interchanges will be constructed directly to MRR2 with the first interchange to be completed within 18 months from the first launch.

In line with group strategy. The acquisition bolds well with the strategy of the company to increase its presence in the Klang Valley. Given the strategic location and size of the lands along with UEMS' track record in Mont Kiara, we believe the development should contribute positively to the group in the future.

Forecast. We impute the contribution from the above development (expected from FY20 onwards) and introduce our FY20 forecast. We also take the opportunity to revisit our forecast assumptions (take-up rates and launches) and lower our FY18e and FY19f earnings forecast by 8.0% and 25.4%.

Maintain HOLD, TP: RM1.20. Target price is raised to RM1.20 (from RM1.18) after taking into account the new landbank and estimated GDV from the above. Our TP is based on unchanged 60% discount to RNAV of RM2.99. Despite trading at a steep discount to its RNAV and significant upside to our target price, we see lack of near term catalyst given the subdued sentiment for property outlook in Johor.

Source: Hong Leong Investment Bank Research - 16 Apr 2018