FY21 CNL of RM117m is wider-than-expected due to higher-than- expected operating costs which dragged the group into a loss. Nonetheless, FY21 sales of RM1.45b came above our/management’s RM1.2b target. Despite the underperformance, we keep OP with an unchanged TP of RM0.40 as we deem current share price a value buy (at FY22E PBV of 0.27x). Our buy thesis comes from its internally-led initiatives to gradually improve earnings. However, if all these initiatives still fail to reinvigorate earnings, we believe external intervention in the form of M&A could re-emerge in the medium term given the current appealing valuations.

Missed expectations. 4QFY21 core net loss (CNL) of RM61m is wider-than- expected which dragged FY21 CNL further into the red at RM117.5m. The negative deviation stemmed from higher-than-expected operating costs which significantly dragged the group into a loss. No dividends as expected.

Meanwhile, 4QFY21 sales of RM543m lifted FY21 sales to RM1.45b – above ours/managements RM1.2b target. The sales quantum is backed by RM550m of launches. The sales outperformance is largely led by last minute purchases just before the Home Ownership campaign (HOC) ended in Dec-21. Note, out of the RM1.45b sales recognised, c.RM1.2b (or 83%) came from HOC.

Highlights. QoQ, Despite the higher revenue in 4QFY21 (+133%), bottom-line CNL of RM61m is worst off against 3QFY21 CNL of RM45m due to the higher operating expense incurred (+111%). Note that the higher revenue is largely attributed to a land sale worth RM219m in SilC Ph3 which has no contributions to profits (merely monetising asset). YoY, FY21 CNL of RM117.5m narrowed against FY20 CNL of RM127m due to the easing lockdown measures which saw its JV division turned to RM1.8m of profits from a loss of RM57m.

Management targets FY22E sales of RM1.5b – versus our RM1.3b target (raised from RM900m). Planned launches worth RM3.3b this year includes developments from (i) Collingwood, Melbourne (AUD250m), (ii) Mont Kiara 31 (RM740m), (iii) Serene Heights Bangi, (iv) Taman Connaught high rise Phase 1 (RM550m) and (v) landed homes in Johor (RM810m). As of Dec-21, unbilled sales stood at RM2.34b. Our sales target is more conservative vs management in view of the absence of HOC this year and the anticipation of the interest rate hikes in 2HCY22 which will likely deter potential buyers.

Needs larger revenue base to cover stubborn operating and finance costs. Due to the lack of launches in the prior years, UEMS’s unbilled sales have deteriorated from a RM4.0-RM5.0b level during FY17-FY18 period and currently straddles at RM1.5b-RM2.4b (RM2.34b as of 4Q21). These levels of unbilled sales are insufficient to provide a large enough revenue base to cover their fixed operating costs of c.RM300m/annum and financing costs of c.RM140m/annum. Acknowledging this issue, UEMS management is trying hard to replenish their unbilled sales – which explains their aggressive FY22E launch target of RM3.3b. Nonetheless, in a landscape where housing supply is abundant (from overhangs) coupled with the lack of government incentive measures this year, growing its unbilled sales would be an uphill task for the group.

Post results, reduce FY22E earnings to a CNL of RM45m (from CNP of RM55m) as we anticipate a longer earnings turnaround gestation. We also introduce FY23E CNL of RM8m.

Maintain OP with an unchanged TP of RM0.400 on 0.30x FY22E PBV. Our OP thesis comes from UEM’s internal improvements, more land/non-core asset sales, and faster turnaround of projects which would eventually bring a turnaround to earnings. However, if all of these internally-led initiatives still fail to reinvigorate earnings, external intervention in the form of M&A would likely re- emerge in the medium-term given the appealing valuation of current share price.

Recall back in Oct-20, Khazanah (through UEM Group), being the largest shareholder of UEMS (at c.70%) had proposed for UEMS to merge with ECOWLD through a share swap. However, the plans failed to materialise after discussions. Since then, Ecowld’s share price has appreciated 178% to RM1.10 (as of yesterday) while UEMS share price has remained relatively unchanged. Hence, from Ecowld’s perspective, UEMS valuation (in share swap terms) is technically at a huge discount compared to when the plan was first mooted in Oct-2020 – which makes such M&A much more appealing for ECOWLD now.

*CNP excludes unrealized FOREX losses/gains, gain/loss on disposal of non-property assets, FV adjustments, inventory impairments,

Source: Kenanga Research - 24 Feb 2022