Period  3Q14/9M14

Actual vs. Expectations 9M14 core earnings of RM208m made up 39% of both street’s, and our, full-year estimates. However, note that both estimates include c.RM260m worth of land sale gains (PATAMI) arising from the KLK and MotorsportsCity deal, which is expected to be recognized in 4Q14. Stripping this out from respective estimates, 9M14 core earnings made up 78% of both street’s, and our, adjusted forecasts.

 The period recorded sales of RM641m, accounted for 32% of management’s, and our, FY14E sales target of RM2.0b. While this may appear very weak, do note that the group will be recognizing lumpy sales in 4Q14 from their Aurora@Melbourne project (launched AUD570m out of AUD757m) which achieved 95% bookings to date.

Dividends  None, as expected.

Key Results Highlights QoQ, revenue was up by 5% due to Horizon Hills land sales (RM44m); without this land sale, revenue would be marginally lower (-1%). Core earnings declined by 4% and the main culprit was a surge in finance costs by 189% to RM18.7m due to the uncapitalized Sukuk interest. However, once the Sukuk is allocated to specific projects, we can expect finance costs to be reduced in the income statement as it will be capitalised at a project level.

 YoY, 9M14 revenue was down by 30% while corresponding core earnings were dragged down by 59%. This was largely due to recognition of Puteri Harbour land sales to Liberty Bridge for RM401m and to Southern Marina for RM182m. Stripping out the land sale gains in both periods, 9M14 core earnings rose by 14% as there are more development billings this year.

Outlook  UEMS is keeping to their KPIs, including its FY14E sales target of RM2.0b. There is no guidance for FY15E sales target although the group is looking at a tentative launch size of RM4.0b. Pending management’s guidance, we may review FY15E sales target in the near future. UEMS is also open to potential landbanking. (Refer overleaf).

Change to Forecasts No changes to estimates. Unrecognized revenue of RM2.8b provides slightly more than a year’s visibility.

Rating Maintain MARKET PERFORM

Valuation  At this juncture, we reckon most of the negatives have been priced-in as the stock registered -24% YTD share price return vs. the KLPRP’s +9%. However, investors will be looking for fresh catalysts or some reprieve from the challenging Johor property market (e.g. RTS, HSR, cessation of large land reclamations for property development, policies to manage influx of foreign developers). Maintain TP of RM1.93 based on 58% discount to our FD RNAV of RM4.56. Our applied discount is close to its historical peak levels (60%) and well below our sector average of 41%.

Risks to Our Call    Unable to meet its sales target or exceeding sales target. Impact from Singapore’s property policies. Sector risks, including further negative policies. Upside risks includes new fresh catalysts (e.g. infrastructure/connectivity plays in Johor) and improvements in property demand trends.

Source: Kenanga