UEMS reported 1H22 core PATAMI of RM38.3m (1H21: -RM15.1m) which were above expectations mainly due to land sale gains. We increase our earnings forecast for FY21 to RM70.2m from -RM22.8m as we included land sale gains in our earnings forecast. We remain cautious on the group’s near term prospects given the weakening sales momentum and the labour shortage condition. Maintain HOLD with an unchanged TP of RM0.30 based on a discount of 85% to our estimated RNAV of RM1.97.

Above expectations. UEMS reported 2Q22 core PATAMI of RM26m (+8.8% QoQ; 2Q21: -RM9.3m), bringing 1H22’s sum to RM38.3m (1H21: -RM15.1m). The results exceeded our and consensus full year forecast of -RM22.8m and RM33.5m respectively. Note that we have previously excluded land sale gain of RM18m from our core PATAMI calculation in 1Q22, but have included it back in our 1H22 core PATAMI calculation as information on land sale gain is no longer disclosed separately. This in part explained the large deviation compared to our forecast. 1H22 core PATAMI was arrived at after excluding net EIs amounting to RM1.5m from (i) forex gain of RM3.1m; (ii) doubtful debts allowance of -RM1.8m; (iii) receivables impairment write back of RM556k; and (iv) loss on subsidiaries disposal of -RM479k.

Dividend. None (2Q21: none). 1H22: none (1H21: none).

QoQ. Revenue declined -12.4% due to lower land sale amounting to RM51m (-59.8% from RM127m). Land sale contributed to 14% of revenue this quarter (vs. 30.5% in 1Q22). Despite the revenue decline, core PATAMI increased by +1.12x due to higher gross profit margin of 31.3% (vs. 23.7% in 1Q22) arising from better land sale margin.

YoY/YTD. Revenue increased by +46.5% YoY and +55.7% YTD. The revenue increase was due to (i) higher land sale; and (ii) better construction activities as there was construction halt in June SPLY due to MCO3.0. Consequently, the group core PATAMI improved to RM26m for 1Q22 and RM38.3m for 1H22 (vs. -RM7.4m in 2Q21 and -RM12.6m in 1H21).

Sales and launches. UEMS recorded 2Q22 sales of RM328.9m (+2x QoQ; -24.4% YoY), bringing 1H22’s sum to RM439m (-37.9% YoY), representing 29.3% of its full year sales target of RM1.5bn. Unbilled sales as at 2Q22 stands at RM2.3bn (+4.5% QoQ from RM2.2bn in 1Q22), representing a 1.86x cover ratio of FY21 revenue.

Outlook. We believe the group is headed in the right direction in strategizing its land bank portfolio through sale of non-strategic lands while acquiring new parcel of lands for future developments. While sales saw a healthy pick up sequentially, it is still trailing quite significantly behind its full year target. Looking ahead, we remain cautious on the group’s near term prospects as we believe the group’s operating profit (excluding land sales) remain under pressure mainly due to (i) weakening sales due to end of HOC and lack of launches earlier of the year; and (ii) lower construction activities due to industry wide labour shortage.

Forecast. We increase our earnings forecast for FY22 to RM70.2m from -RM22.8m as we included land sale gains in our earnings forecast. We leave our FY23/24 forecasts unchanged.

Maintain HOLD with an unchanged TP of RM0.30 based on a discount of 85% to our estimated RNAV of RM1.97. While we view positively the group’s recent corporate exercise to optimize its land and development portfolio for a more targeted and sustainable growth plan forward, nonetheless, we are still cautious on the group’s near term prospects given the weakening sales momentum and the labour shortage condition. 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 - 25 Aug 2022