News  UEMS and KLK Land (the wholly subsidiary of the listed plantation giant, KLK Bhd) have proposed to jointly develop: (i) a mixed development spanning 2,500ac (Phase 1) freehold land at Senai, Kulai Jaya, Johor (Fraser Estate) on a 60:40 basis under a JV Co and (ii) a mixed development over 500ac freehold land at Gerbang Nusajaya on a 40:60 basis under a JV Co. The Gerbang Nusajaya land which is owned by UEMS is valued at RM871.2m (or RM40psf) implies gross gains on disposal of RM380m. KLK is the land owner of the Fraser Estate land which is also valued at RM871.2m or (RM8psf).

Comments  The Gerbang Nusajaya JV (GDV: RM5.0b) land is next to the Motorsports City. It will be a “green” mixed development with more emphasis on landed residentials which will target 50% locals and 50% foreigners.

 The Fraser Metropolis JV (GDV: RM15.0b) land is in the Senai-Skudai area and is located 40km away from Gerbang Nusajaya in Iskandar North. It enjoys good accessibility via highways, Senai Airport and railways. The emphasis of the township will be: (i) industrialists looking for cheaper entry points and (ii) affordable landed residential which is mainly targeted at locals.

 Rationale for the JVs - UEMS has embarked on this arrangement to diversify its demand mix within Iskandar Malaysia and expedite development of the entire Gerbang Nusajaya (total: 4500ac). In the case of its Fraser Metropolis JV, it offers UEMS an exposure to a more sustainable pricing-point profile for their future earnings and thus, a wider demand base.

 We are positive longer term as earnings impact will likely be from FY16 onwards. We believe the land price is attractive as expected project pretax margins for Gerbang Nusajaya JV is 20%-25% while we think that Fraser JV will see higher margins of up to 30%.

Outlook  Gerbang Nusajaya JV project launch is likely towards 2H15 over eight years. However, Fraser Metropolis JV will take some time to kick-off as it is farther from the land approval stage vs. Gerbang Nusajaya; launch will likely be in FY17 and will last for 15 years.

Forecast  No changes to FY13E and FY14E earnings. UEMS entitlement of 60% of the gains on disposal is likely to be recognised in FY15. Meanwhile, we expect the JV project contributions to take place beyond FY16.

Rating Maintain OUTPERFORM

Valuation  Maintain OUTPERFORM and TP of RM2.76. FD RNAV increases by 4% to RM4.82. At current price, the stock is trading at 56% discount to its new FD RNAV or beyond - 2.0SD of its historical average. However, we prefer to maintain our TP at RM2.76 based on a wider discount of 43% to a higher FD RNAV as sentiment remains weak.

Nonetheless, we believe the downside risk is limited at this juncture, while we anticipate more deals to unfold over the next 6-12 months. We also expect sentiment to recover by mid-year once all the negatives have been fully digested while a weaker Ringgit bodes well for demand in Johor.

Risks to Our Call Unable to meet its sales target. An up-cycle in Singapore’s property sector. Sector risks, including negative policies.

Source: Kenanga