UEMS is disposing 163.92 acres of land in Iskandar Puteri, Johor for RM310m and we estimate a net gain with disposal margin of 45%. The disposal is not a surprise as UEMS expressed the need to divest and lighten its balance sheet and we view this positively as FY18E net gearing becomes more manageable at 0.44x. Raise FY18E CNP by 76%. No significant impact to TP of RM1.30. Maintain OUTPERFORM.

Land disposal. UEMS has entered into an agreement to sell 163.92 acres of freehold land in Iskandar Puteri, Johor Bahru (refer overleaf for location map) for RM310.0m (RM43.4psf), which is just at a slight premium to the independent market valuation of RM300-307m. We gather that there are no land use titles yet although it has been zoned as commercial use. The net gain from the disposal is not revealed, but we estimate a net margin of 45% or RM139.5m net gain based on historical trends. The disposal is expected to be completed by 3Q18.

Positive on the disposal. The news is not surprising to us as UEMS indicated that more divestments will take place to manage its balance sheet stress while providing funding opportunities for potential land banking outside Johor. The disposal will lower FY18E net gearing from 0.57x to a more comfortable level of 0.44x.

Management remains confident of its FY17E sales target of RM1.20b and we believe it will be achievable thanks to its third home ownership campaign (“Signature Selection”) which features EASY Own Plan, which includes easy entry options (low down payments), rent-to- own at locked-in prices, easy financing and other privileges for selected projects. The recently launched Solaris Parq Tower A has been very well received, with Serimbun@Bukit Indah as the remaining launch for the year. The company still has c.RM2b worth of unsold products (WIP/inventories at market value) as well. We believe more divestments of its Johor landbanks are likely as part of its longer term strategy to reduce reliance on Johor. Management mentioned that resumption of dividends will only be determined in 4Q17; until then, we have assumed no dividends for now.

Raising FY18E CNP by 76% after imputing for the net gain on disposal while also taking the opportunity to push back some of the local billings assumptions. Note that for UEMS, land sale gains are part of its CNP as it is a recurring exercise.

Maintain OUTPERFORM. The transaction has minimal impact to our TP as our FD RNAV is only increased by 1%. Our TP of RM1.30 is based on 70% discount to its FD RNAV of RM4.34. Our applied discount is based at -0.5SD to its historical mean after considering their big exposure in Johor. It sales outlook has stabilized somewhat, thanks to more overseas and Klang Valley drivers. Although near-term catalysts are lacking, we believe the company’s outlook is more stable at the moment and given the retracement in share price and active efforts to manage its balance sheet.

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

Source: Kenanga Research - 31 Oct 2017