News

Proposed share subscription agreement to issue and allot 524.4m shares or an 11.6% increase in UEMS’ share capital to its parent, UEM Group (UEM), to raise RM770.9m cash (based on RM1.47 which is a 10.0% premium to its 5-day VWAP).

Rationale of this share subscription is to maintain its stake in its subsidiary Bandar Nusajaya Development S/B (BND) which is currently held under the BND-RFPS (maturity: Nov- 15) via UEM; upon maturity, the 450m BND-RCPS of RM1.00 each will become BND shares, which results in the parent (instead of UEMS) having a direct 21.8% exposure in BND. UEMS is the property arm of UEM and will remain so, thus, the proceeds from the share subscription will be utilised to redeem BND-RCPS. Expected completion is in 3Q15.

Comments

Substantial shareholders like LTH and EPF will be diluted by 0.6ppt to 0.5ppt to 4.5% each, respectively, based on LPD (note that EPF has already recently ceased to be a substantial shareholder of UEMS as it has already pared down its stake to less than 5.0%). Meanwhile, UEM’s stake will increase to 69.6% from 66.1%. However, we are glad that the parent is the one taking up the additional stake at a premium to current prices as it shows the strong level of commitment to its daughter company while limiting risks of heavy sell-downs.

FY15-16E core PERs will be diluted by 11.6% each to 18.1x- 16.1x. Positively, FY15E net gearing has been pared down to 0.18x from our previous estimates of 0.32x.

We are not surprised by the cash call as we had mentioned in our last sector report (30/12/14) that most developers will consider some form of cash call. Although there are dilutions to core PERs and existing shareholding structures, we are actually relieved with the lightened balance sheet effect. This is because the bulk of FY14 sales were driven by its Australian project, where billings are only collected and recognized upon completion, and coupled with the challenging local property market, we believe a light balance sheet is apt.

Outlook

UEMS has yet to reveal their FY15 KPIs as the meeting with the new CEO, Anwar Syahrin, was postponed. We continue to maintain our assumptions based on management’s indicative FY15 sales target of RM2.0b.

Forecast

No change to earnings estimates. However, per share data will reflect the enlarged share base.

Rating

Maintain MARKET PERFORM

Valuation

While there are no near-term catalysts, the stock is trading very closely to its book value vs. its historical Fwd PBV average of 1.7x, implying that downside risks are capped.

Our FD RNAV has been reduced by 6.7% to RM4.26 after taking into account the dilution impacts of the share subscription. We also take this opportunity to widen our FD RNAV discount wider to 65.0%, from 62.0% previously, which (i) will be inline with the expansion in our average sector RNAV discount observed over the last quarter (refer to Property Sector Report, 6/4/15), and (ii) steeper than the average sector’s RNAV discount of 50% due to Johor exposure. Hence, we lower our TP to RM1.47 from RM1.60.

Risks to Our Call

Weaker-than-expected property sales.

Higher-than-expected sales and administrative costs.

Negative real estate policies.

Tighter lending environments.

Source: Kenanga Research - 6 Apr 2015