UEMS is disposing its Canada land for RM372.6m. The sales is expected and a positive for its net gearing which will be reduced to 0.45x. No special dividends are expected considering the working capital commitment of their Australian projects. Raising FY17E CNP by 45% given expected gains on disposal of RM72.0m. Maintain MARKET PERFORM with a higher TP of RM1.33.

Canada land disposal of RM372.6m. UEMS has disposed their Alderbridge land in Richmond, British Columbia, Canada (4.9 ac) for RM372.6m (CND113.0m). Proceeds will be used for working capital requirements. The expected net gain on disposal is RM72.0m with completion expected by 3Q17.

Expected news which is a plus for the group?s balance sheet. The disposal is expected as it was highlighted during the last analysts? briefing. The disposal is part of the group?s initiative to streamline their assets to concentrate on Australia and Malaysia. We view this positively from a balance sheet point of view as the disposal helps reduce FY17E net gearing from 0.52x to 0.45x while building up working capital required for its Australian projects where billings are only collected upon project completion. As a result, we do not expect any special dividends to arise from this disposal.

Raising FY17E CNP by 45% due to the gain on disposal. We typically include land sales as part of their business operations and thus, raise their FY17E sales by 30% to RM1.59b but maintain our property only sales at RM1.22b. However, we make no changes to FY18E sales of RM1.23b and CNP as we have not imputed for any other land sales.

Management still targets FY17E property sales of RM1.20b (-12% YoY) on the back of RM1.70b worth of new launches (St Kilda@Melbourne, Serene Heights@Bangi, Solaris 3, D?Santuari@Johor) and c. RM2.4b worth of unsold projects. The issue of the tax penalty (RM73.8m) is still under appeal and no provisions has been made as yet as the company believes there are strong grounds; if the appeal fails, the group believes they have sufficient tax credits from unmaterialized land sales to offset the cash-flow impact. Besides selling lands in SiLC 3, which we have imputed for, we believe the group may embark on other divestments (details yet to be disclosed) which could include strategic land sales in Gerbang Nusajaya and Puteri Harbour.

Maintain MARKET PERFORM with higher TP of RM1.33 (from RM1.24). The disposal results in a slightly higher FD RNAV of RM4.30 (from RM4.29). However, we believe that their property sales outlook has stabilized while a better balance sheet position with active efforts to lighten its balance sheet warrants a narrower discount rate of 69% (between -0.5SD to mean levels) from our previous 71%. However, the lack of dividend pay-out still warrant some caution and without further divestments, their Australian working capital commitments may increase the odds of some form of cash-calls (particularly hybrids).

Risks include: (i) stronger/weaker-than-expected property sales, (ii) margin fluctuations, (iii) changes in real estate policies, and (iv) changes in lending environments.

*Note that UEMS is the only developer under our coverage that practices progressive recognition for projects in Australia instead of the norm of recognition on completion. However, do note that collection of billings from Australia projects is based on completion by other developers under our coverage.

Source: Kenanga Research - 14 Mar 2017