UEMS has signed a term sheet with Themed Attractions Resort & Hotels Sdn Bhd (TAR&H) for the downsizing of the Desaru Land from 679 acres to 228 acres. We are positive on the news as the transaction would reduce UEMS’ exposure in Desaru to a more manageable size. There will be no immediate impact towards earnings as the development of the entire land will span over a long term. Management has guided that the first phase of the development may only be launched in FY20. Maintain forecasts pending further information on the revised land area. Maintain HOLD with an unchanged TP of RM0.79 based on a 70% discount to estimated RNAV of RM2.64.

NEWSBREAK

UEMS has signed a term sheet with Themed Attractions Resort & Hotels Sdn Bhd (TAR&H) for the downsizing of the Desaru Land from 679 acres to 228 acres. The said land will be retained and developed by Desaru North Course Residences Sdn Bhd (DNCR), a UEMS-Desaru North Course Berhad (DNC) JV (51:49). Note that DNC is an indirect subsidiary of TAR&H. The original purchase consideration for the land is RM485.3m, whereby RM194.1m has already been paid fully by UEMS. The revised (i.e. reduced) land area however, is only worth RM120.8m and the excess amount of RM73.4m will be refunded to UEMS. Furthermore, TAR&H will be subscribing RM33.6m worth of new shares in DNCR to maintain its 49% equity interest. As such, the total amount due from TAR&H towards UEMS will be RM107m. In addition, UEMS will be purchasing a theme park building (64.4k sqft NLA) and retail space in Somerset and Marina Walk Puteri Harbour (146.8k sqft NLA) from TAR&H for RM145m. The purchase will be settled in the following manner: i) RM107m to be off-set by the amount due from TAR&H; and ii) RM38m to be settled in cash over 5 years from 1 year after the execution of the definitive agreements.

HLIB’s VIEW

Positive on the news. We are positive on the news as the transaction would reduce UEMS’ exposure in Desaru to a more manageable size. Furthermore, UEMs will be able to save on additional investment required had the Desaru Land not been downsized. This savings would allow them to focus funding towards flagship developments in Puteri Harbour. Note that UEMS currently owns c.726 acres of land in Puteri Harbour with a potential GDV of RM17bn over the next 15 years.

Impact of the downsizing. With regards to the revised land area, management has yet to establish an estimated GDV. Before the downsizing, the land had an estimated GDV of RM5.3bn (after adjusting for stake) in the pipeline. Nonetheless, we estimate it to reduce remaining GDV of the southern region (after adjusting for stake) by c.5%. There will be no immediate impact towards earnings as the development of the entire land will span over a long-term. Management has guided that the first phase of the development may only be launched in FY20.

Forecast. Unchanged pending further information on the revised land area. Maintain HOLD with an unchanged TP of RM0.79 based on a 70% discount to estimated RNAV of RM2.64. We see lack of near-term catalyst given the subdued sentiment for property outlook in Johor as well as potential bumpy earnings moving forward given the adoption of MFRS15 in the recognition of their overseas projects.

Source: Hong Leong Investment Bank Research - 17 Jun 2019