UEMS reported narrower FY21 core losses of -RM120.4m (FY20: -RM173.9m) which was below expectations largely due to shrinking margin, likely from rising raw material costs. Sales of RM544.7m were achieved in 4Q21, which brought FY21 sales to RM1.46bn, exceeding its sales target of RM1.2bn. Moving into FY22, management is setting a flattish sales target of RM1.5bn as well as launches of RM3.3bn. We believe property sales could be challenging for UEMS in FY22 from the lack of catalysts (i.e. HOC ended in Dec 2021; HOC contributed c.80% of UEMS’s FY21 sales). Furthermore, margin could be compressed as well from the higher raw material costs and lack of ability to increase selling price. We now forecast losses of -RM23.4m in FY22 (from profit of RM72.9m) as we expect margin will shrink from the higher raw material cost. Our FY23 forecast also reduced by -42%. Reiterate our HOLD with a lower TP of RM0.37 (RM0.38) pegged to a discount of 80% to our estimated RNAV of RM1.83.

Below expectation. UEMS reported 4Q21 core LATMI of -RM60.9m (3Q21: -RM44.8m, 4Q20: -RM87.4m) which brought FY21 core LATMI to -RM120.4m (FY20: -RM173.9m). The results were below expectations vs our full year forecast of -RM72.9m and consensus of -RM74.5m largely due to shrinking margin likely from rising raw material costs. We added back RM93.9m worth of EIs (mostly from impairment loss of inventory) from FY21 reported net loss of –RM214.3m.

QoQ. Core LATMI widened to -RM60.9m (from -RM44.8m) despite the higher revenue (+133%) due to higher COGS by (+191.2%) as well as higher other expenses (+45.7%).

YoY. Revenue was lower by 18.9% due to settlement of project Aurora Melbourne Central's serviced apartments in 4Q20. In turn, core LATMI widened to -RM60.9m (from -RM87.4m) in tandem with lower revenue.

YTD. UEMS chalked in narrower losses of -RM120.4m (from -RM173.9m) on the back of higher revenue by 6.5% thanks to improved sales and progressive billings recognition as MCO3.0 and NRP Phases were less restrictive compared to MCO1.0.

Sales and launches. Sales of RM544.7m were achieved in 4Q21, which brought FY21 sales to RM1.46bn, exceeding its sales target of RM1.2bn. The top sales contributor was mainly from Residensi AVA (91% sold), Residensi Allevia (50% sold), KAIA Heights (37% sold) Senadi Hills (89% sold) and Serene Heights (95% sold). Unbilled sales increased by 9% QoQ to RM2.4bn (2.0x cover ratio). RM550m worth of projects have been launched in FY21, falling short of its RM1.2bn target launches.

Outlook. Moving into FY22, management is setting a flattish sales target of RM1.5bn as well as launches of RM3.3bn. We believe property sales could be challenging for UEMS in FY22 from the lack of catalysts (i.e. HOC which ended in Dec 2021; HOC contributed c.80% of UEMS’s FY21 sales). Furthermore, margin could be compressed from the higher raw material costs and lack of ability to increase selling price. Nonetheless, we foresee narrower losses for FY22 as we expect progressive billings to improve as the project move into next stages of construction.

Forecast. We now forecast losses of -RM23.4m in FY22 (from profit of RM72.9m) as we expect margin will shrink from the higher raw material cost. Our FY23 forecast is also reduced by -42%.

Maintain HOLD with a lower TP of RM0.37 (RM0.38) pegged to a discount of 80% to our estimated RNAV of RM1.83. 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). Furthermore, we reckon property sales could be challenging for UEMS in FY22 from the lack of catalysts (i.e. ending of HOC which UEMS was highly reliant on to drive sales).

Source: Hong Leong Investment Bank Research - 24 Feb 2022