News

UEMS is selling Imperia Building, Puteri Harbour to its parent, UEM Group (UEMG), for RM137.8m (including GST of RM7.8m) which will be settled entirely by cash. The building consists of a 16-storey office tower, retail lots and car park currently at c.98% progress and will be completed by end July-15. This works out to RM289psf on GFA basis (GFA: 0.48m sf) or RM385psf on NLA basis (assuming NLA of 0.36m sf). The expected net gain from the disposal is RM16.2m and should be completed by 3Q15. The rationale of the disposal is to provide UEMS with the necessary funds to help redeem the BNDRCPS which is held by the parent, and the already announced proposed share issuance by UEMS to UEMG (refer to 6/4/15 UEMS QB).

Comments

Overall, we are NEUTRAL on the deal as the main purpose is for UEMG to realign its direct stake in UEMS subsidiary. Additionally, the gain on disposal appears to be fair while impact to balance sheet is minimal as the funds will be used to redeem part of the BND-RCPS.

Based on the announcement, the acquisition price is above the appraised market value by Knight Frank of RM124.8m. Unfortunately, we were unable to make our own assessment as there are few comparable office/retail transactions available. The implied net yield of the asset is 7.0% (based on guided rental projection of RM12.0m p.a. and 80% NPI margin), which is on par with most office cap rates of 7.0%-7.5%. However, we note the NLA implied pricing is significantly lower than some of the condominiums at Puteri Harbour of RM700-1100psf. Furthermore, the implied net margin of 11.8% is lower than its group’s net margin.

Outlook

The Group’s KPI of achieving at least RM500m earnings in FY15 appears to be more bullish than ours. However, we reckon that in order for the group to meet their target, a strategic lumpy land sale must take place; we have not factored for this in our estimates, save for the sale of Imperia Building. In 2015, sales will be largely driven by Australia while the group has lined up some new launches in Johor and Klang Valley in the next two quarters.

Forecast

No changes to earnings as the impact from the gains on disposal on FY15E is not overly material (c.3%).

Rating

UNDER REVIEW (previously MARKET PERFORM)

Valuation

Our CALL/TP is Under Review with a potential negative bias pending our upcoming Property Sector Strategy report, which will be out by end of this week. Our previous TP of RM1.26 is based on a discount rate of 70% to its FD RNAV of RM4.26. The stock has made a new low today and is trading at 0.7x Fwd PBV amidst the weaker broad market. However, the stock lacks near-term catalysts and is plagued by concerns on its Johor exposure, which affects the realization of its RNAV.

Risks to Our Call

Weaker-than-expected property sales. Higher-thanexpected sales and administrative costs. Negative real estate policies. Tighter lending environments.

Source: Kenanga Research - 1 Jul 2015