Proposed 50-50 JV to develop 72.7ac mixed-development land in Kepong. Its share subscription amounts to RM279.3m while the land cost to the JV is RM416.4m. Overall positive on the acquisition as a diversification to the Klang Valley coupled with attractive pricing and favourable payment schedule. Net gearing position remains healthy but earnings accretion will be after FY19. Maintain MARKET PERFORM with a higher TP of RM0.970.

JV to develop 72.7ac Kepong land. UEMS has entered into a conditional Shareholders’ Subscription Agreement (SSA) with Mega Legacy (M) S/B (MLM) to subscribe to 500,001 shares in MLM for RM279.3m. This will result in a 50:50 JV ownership of MLM between Mega Legacy Equity S/B (MLE) and UEMS; but note that UEMS will assume controlling interest in MLM, which will allow UEMS to consolidate this project at the group level. Simultaneously, MLM entered into an SPA with Datuk Bandar Kuala Lumpur (DBKL) to acquire 72.7ac leasehold mixed-development land for RM416.4m. The project has an indicative GDV of RM15.0b over a 15-year development period. (Refer overleaf for location map and other details.)

Attractive pricing and land payment terms. The price-tag of the land of RM416.4m (RM131psf) is attractive as it is well below the market valuation of RM950m (RM300psf); our own checks also indicate that most transactions of smaller land plots are mainly above RM200psf. The initial 57% of the land payment will take place within 3 months of MLM’s receipt upon meeting the CP of State Authority’s Consent for the transfer of the first parcel to MLM (refer overleaf) and the remaining 43% will be in the form of payment in kind which alleviates balance sheet obligations (refer overleaf for details). UEMS will pay for its subscription in MLM (RM279.3m), and assuming the exercise can be completed in 2019, this would increase FY19E net gearing to 0.38x from 0.34x, which is still at a healthy level.

Positive on the acquisition, but earnings accretion will be beyond FY19. Not only is the price tag attractive, we also favour the type of land acquired as UEMS needed to diversify its landbank outside Johor and demand in Klang Valley, particularly in matured areas closer to KL city centre, has been relatively better than other areas. Given a very low land cost-to-GDV ratio of 3%, which is extremely rare nowadays, we believe gross margins could range between 35-40%, depending on design and construction complexity. Based on expected completion of the deal in early FY19, we believe the launch will likely take place towards the latter part of FY19 to FY20, which has no major earnings impact on FY18-19E earnings. Hence, we maintain our earnings estimates for now.

Maintain MARKET PERFORM. The project increases our FD RNAV by 3% to RM4.51. However, we opt to maintain our discount at 79% (trough levels) due to the sector’s de-rating in ROEs, as highlighted in our recent sector report (5/4/18). Hence, our TP is raised to RM0.970 from RM0.935. We believe the sector will remain subdued albeit the trough valuation levels as sales trajectory remains relatively unexciting while outlook for the sector is still challenging.

Risks to our call include: (i) weaker or stronger 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. *CNP excludes unrealized FOREX losses/gains, gain/loss on disposal of non-property assets, FV adjustments

Source: Kenanga Research - 16 Apr 2018