UEMS reported 1QFY20 core LATMI of -RM3.5m (from RM111.7m QoQ, RM24.2m YoY). New sales of RM97.4m were achieved in 1Q20 while local unbilled sales stood at RM1.2bn, representing a cover ratio of 1.4x towards local property development revenue. The FY20 sales and GDV launch targets (both at RM2bn) will be likely be revised lower but at a later date. Separately, UEMS will be acquiring a site in Melbourne for AUD43m and the project is targeted to launch closer to 2022. We lower our FY20/21 forecasts by -46.4%/-13.6% and maintain HOLD with a lower TP of RM0.49 (from RM0.54) based on a higher discount at 80%.

Below expectations. UEMS reported 1QFY20 core LATMI of -RM3.5m (from RM111.7m QoQ, RM24.2m YoY) in comparison to ours and consensus full year profit forecasts of RM124.8m and RM148.8m respectively. We deem it below expectations largely due to lower than expected progressive billings recognition and we were initially expecting 1QFY20 to remain profitable. 1QFY20 core LATMI sum has been arrived after excluding -RM18.4m of EIs (forex losses).

QoQ/YoY. Revenue fell -83.1%/-53.3% to RM195.9m largely due to a larger settlement of Australian projects (i.e. Conservatory and Aurora in Australia) both in 1QFY19 and 4QFY19. Subsequently, 1QFY20 recorded a core LATMI of -RM3.5m (from RM111.7m QoQ, RM24.2m YoY) in tandem with the decrease in revenue coupled with lower margins as most projects are in the early stages of construction coupled with a higher effective tax rate due to non-deductibles.

New sales of RM97.4m was achieved in 1Q20, representing 5% of FY20 sales target of RM2bn (to be revised). Unbilled sales on the local front stood at RM1.2bn, representing a cover ratio of 1.4x cover ratio towards the local property development revenue. Meanwhile on the international front, hand over the last remaining units of its completed Australian projects which comprises of RM105.9m from Conservatory and RM393m from Aurora Melbourne Central is targeted for the rest of FY20.

A land acquisition in Melbourne, Australia. Separately, UEMS had signed a contract of sale with Jowett Properties Pty Ltd to acquire 1.33 acres (58k sqft) of a freehold site located at 21-53 Hoddle Street, Collingwood in Melbourne near the CBD for a consideration of AUD43m. The aforementioned land is planned for a mixed-used development garnering an estimated GDV of AUD250m with c.20% pre-tax margin. The settlement is expected in 1QFY21 while the launch date of the project is targeted for either late-2021 or early-2022, depending on the market’s appetite.

Outlook. For FY20, UEMS has yet to revise its sales and GDV launch targets (both at RM2bn) but management notes that it will likely be lowered. We remain cautious on the targets (we expect it to be potentially halved) amidst the ongoing soft market sentiments despite the re-introduction of the HOC. FY20 earnings will be heavily supported by the foreign settlements as the local operations appear much weaker than anticipated. As there are a number of projects in early stages of construction, earnings from the local operations will likely only pick up towards late FY21.

Forecast. We lower our FY20/21 forecasts by -46.4%/-13.6% to reflect lower sales launches and progressive billings coupled with lower margins in FY20. We introduce FY22 earnings at RM140.7m Maintain HOLD with a lower TP of RM0.49 (from RM0.54) based on a higher discount at 80% (from 75%) to estimated RNAV of RM2.47 to reflect the weaker than anticipated Malaysian operations and roll forward our valuation. We see a lack of near-term catalyst given the subdued sentiment for property outlook in Johor.

Source: Hong Leong Investment Bank Research - 29 Jun 2020