News

UEMS has entered into a conditional shares sale agreement (SSA) with WCT to subscribe a 50% stake in the latter’s wholly-own JV company for a consideration of RM214.9m, to jointly develop 608.63ac of freehold land in Mukim Bandar Serendah, Ulu Selangor. Land payment schedule is as per normal practice and the exercise is expected to be completed in 2Q16.

According to WCT’s announcement, it is a mixed development with GDV of RM3.0b, which we reckon is likely to be an affordable township project.

Comments

We were not surprised by this announcement as UEMS has expressed the need to dilute its Johor exposure by diversifying into the Klang Valley and overseas. UEMS had also earlier mentioned that they will consider land swap arrangements (e.g. KLK deal) or JV arrangements such as this one.

Land price is fair based on the land cost-to-GDV ratio of 14% which is a norm and decent enough to reap gross margins of c.25%. The land cost also implies RM16.21psf which is higher than WCT’s last package of Serendah land acquired at RM12psf (Oct-14). The implied land cost is still within the area’s asking prices of RM15-30psf. (Refer overleaf).

Overall, we are positive in the longer-term as the project is targetting the sustainable product ranges, i.e. Klang Valley affordable residentials. However, we are neutral for the nearer term as net gearing is slowly inching up while project contribution will take some time. We expect FY16E net gearing to increase to 0.46x from current estimate of 0.43x, still below the comfort level of 0.5x- 0.6x. However, further significant landbanking may warrant cash calls or perpetual bonds. Impact to FD RNAV is immaterial (+2.0 sen to RM4.29).

Outlook

We think a privatisation is unlikely in the near-term because keeping the entity listed will allow UEMS to raise funds when landbanking opportunities arise (e.g. in Australia, Klang Valley) as the group aims to diversify out of Johor. If the group go for any sizeable acquisitions in the Klang Valley or Australia, we believe cash calls may be necessary.

Forecast

No changes to earnings as we believe significant contributions will only commence from 2018 onwards.

Rating

Maintain MARKET PERFORM

Valuation

No changes to TP of RM1.28 based on a similar discount of 70% on FD RNAV of RM4.29 (RM4.27 previously). Our discount rate is steeper than our big-cap developers’ average of 48% as we prefer to peg it at -1SD levels due to its high exposure in Johor. We also see no near-term catalysts to re-rate the stock, other than the privatisation rumours, which we reckon is unlikely.

Risks

(i) balance sheet risk, (ii) weaker-than-expected property sales, (iii) higher-than-expected sales and administrative costs, (iv) negative real estate policies, and (iv) tighter lending environment.

Source: Kenanga Research - 2 Dec 2015