We believe the longer-than-expected Phase 1 and transition to Phase 2 will hit the construction activity of UEMS, which will eventually impact its progressive billings. For now, management is maintaining its GDV launch target of RM1.2bn with sales target of RM1.2bn. However, we see some downside risks that it may be revised downward later if Covid-19 cases remain high and lockdown is prolonged. Hence, we cut our FY21 earnings forecast by 11.5% to account of lower progressive billings from the loss of productivity. Maintain HOLD with a lower TP of RM0.40 (from RM0.49)

We Held a Virtual Meeting Recently With Management. Below Are Key Takeaways :

Launches. The group maintains FY21 GDV launch target of RM1.2bn with sales target of RM1.2bn. There are 4 projects launched to-date with total GDV of RM300m (94% of units in the RM500-800k segment). These are (i) KAIA Height Tower A, Seri Kembangan with GDV RM171m and take up rate of 30%, (ii) Verna Park Terrace, Bangi with GDV RM57m and take up rate of 57%, (iii) Verna Garden Cluster, Bangi with GDV RM44m and take up rate of 65%, and (iv) Verna Twin Villa, Bangi with GDV RM171m and take up rate of 75%. Future launches for the rest of the year will include recently acquired pocket of land in Taman Pertama, another phase of KAIA Height and Senadi Hills.

Sales. Sales in Apr and May remains encouraging with highest sum achieved YTD in May. Nonetheless, June and July sales have declined due to Phase 1 restrictions. Management assured that they are on track to achieve RM1.2bn sales target. However, we see some downside risk that this target may be revised downward if the lockdown prolongs. Meanwhile, digital sales have increased to 43.4% in FY21 (vs 26.8% in FY20) as management expedited its digital marketing initiatives, sales campaign and collaboration, which in turn has also reduced their advertising and marketing expenses. For international project, total of AUD43m (AUD14m from Aurora Melbourne Central and AUD29m from Conservatory Melbourne) is pending settlement with 43 remaining units yet to handover, to fully settle by the end 2021.

Township development. UEMS’s current township development, Kiara Bay in Kepong, has a GDV of RM17bn in a 72 acres land. Its first high-rise residential development in this township, Residensi AVA (870 units launched in Nov 2019 with GDV of RM 652m), has a secured sales to-date of 66% and booking at 11%. Other than that, the structure of its retail component (the Beat) for this township was completed in mid-March 2021. Meanwhile, fit-out works are in progress and will be completed in 3Q21. Management expects the opening of the Beat in 1Q22. For the township infrastructure component, a 3km internal road from Kiara Bay to Jalan Kepong is completed and has opened to public in Apr 2021.

Updates on construction activity. Currently there are c.40 sites with 70% allowed to operate during FMCO. Management is confident that once NRP Phase 2 is in place, they can catch up with the construction activity. Although management assured there will be no delay in completion of projects, we believe progressive billings will still be affected from Phase 1 restrictions and the transition to NRP Phase 2 is longer than expected.

Other updates. Booking to sales conversion takes about 4-6 weeks to process due to Phase 1 lockdown. Current conversion rate is at 60% (rejection rate of 40%). There will be no major impairment this year as the bulk of it already being recognised in FY20. Apart from that, management has been acquiring pocket land in Klang Valley for the past few years owing to its quick turnaround. Management will continue this strategy and secure new landbanks for more attainable products.

Outlook. As Johor remains one of key market for UEMS (77% of 10.7k acres of landbank are in Southern region), we remains cautious on the challenging market environment there as it remains soft due to depressed valuation and no catalytic developments. Management believes there are opportunities within the domestic market at very specific price point. On brighter note, management has been iincreasing its land bank in the central region to reduce its exposure on Johor. Nonetheless, the protracted lockdown and high Covid-19 cases may affects UEMS’ progressive billings and pose sales challenges ahead due to weak buyer sentiment.

Forecast. Since the implementation of Phase 1 is longer than expected, we cut FY21 earnings by 11.5% to account for lower progressive billings from the loss of productivity. We maintain FY22-23 earnings.

Maintain HOLD with a lower TP of RM0.40 (from RM0.49) as we recalibrated our earnings and pegged a larger discount of 80% (from 75%) to our estimated RNAV of RM1.94. We see a lack of near-term catalyst given the subdued sentiment for property outlook in Johor (in which UEMS has the biggest landbank exposure) as well as the prolonged lockdown and high Covid-19 cases.

Source: Hong Leong Investment Bank Research - 9 Aug 2021