UEMS recorded 1Q22 core LATAMI of -RM5.7m which is in line with our but below consensus’ expectation. We remain cautious on the group as its new sales are weakening with the end of HOC. Post annual report update, our forecasts are adjusted to -RM22.8m/RM65.2m from -RM23.4m/RM62.2m for FY22/FY23. We introduce FY24 forecast. Maintain HOLD with a lower TP of RM0.30 (from RM0.37) pegged to a higher discount of 85% (from 80%) to our estimated RNAV of RM1.97.

Within ours but below consensus expectations. UEMS recorded 1Q22 core LATAMI of -RM5.7m (4Q21: -RM60.9m; 1Q21: -RM5.7m), which is in line with our but below consensus full year forecasts of -RM23.4m and RM36.6m, respectively. Our core LATAMI was arrived at after excluding net EIs of RM24.8m (mainly from gain from disposal of land amounting to RM18m).

Dividend. None (1Q21: None).

QoQ. Revenue declined by -16.1% as land sale contribution was lower this quarter (RM127m vs. RM219m in 4Q21). Excluding land sale, revenue increased marginally by 4.4%. Core LATAMI narrowed to -RM5.7m (from -RM60.9m in 4Q21) mainly due to lower operating expenses and higher share of results from JV and associates mainly from Nusajaya Tech Park and Horizon Hills in Iskandar Puteri.

YoY. Revenue increased by 64.8% mainly due to disposal of lands amounting to RM127m. Excluding the land sale, revenue increased by 14.5% mainly due to better progressive billings as more projects are at the mid to mature stage of their development cycles. Despite the increase in revenue, core LATAMI was flattish at - RM5.7m (from -RM5.7m from SPLY) due to lower gross profit margin.

Sales and launches. UEMS recorded 1Q22 sales of RM110.1m (-79.8% QoQ; - 59.5% YoY) representing 7.3% of its full year sales target of RM1.5bn. New launches for 1Q22 was RM74m, representing 2.2% of its RM3.3bn launch target. Unbilled sales as at 1Q22 stands at RM2.2bn (from RM2.4bn in 4Q21), representing a 1.9x cover ratio of FY21 revenue.

Outlook. We remain cautious on the group’s prospects as the sales from the group is much weaker this quarter impacted by the end of HOC. Despite management guiding that sales momentum has picked up, the sales target of RM1.5bn looks like a stretch and the group is likely to revise down the target at a later point. In addition, the current labour shortage condition in the construction sector will also likely to impact the group’s revenue recognition while the rising construction cost may impact the group’s margin especially for new launches due to the weaker pricing power by the group.

Forecast. Post annual report update, our forecasts are adjusted to -RM22.8m/RM65.2m from -RM23.4m/RM62.2m for FY22/FY23. We introduce FY24 forecast.

Maintain HOLD with a lower TP of RM0.30 (from RM0.37) pegged to a higher discount of 85% (from 80%) to our estimated RNAV of RM1.97. We remain cautious on the group especially given the weakening sales momentum after the end of HOC. Furthermore, the rise in construction cost, labour shortage and interest rate upcycle are challenges that the group will face in its path to return to profitability. In addition, the group also has a large land bank exposure in Johor where the property outlook there remains weak.

Source: Hong Leong Investment Bank Research - 26 May 2022