No signs of recovery

Potential oversupply in Iskandar Malaysia. UEMS enjoys the advantage of low land cost at Iskandar Malaysia, as the master developer of Iskandar Puteri. However, after the strong price appreciation of land and properties in recent years, the market has started to grapple with increasing property supply, especially high-end condos, which have been exacerbated by the aggressive entry of Chinese developers. The weak sentiment towards Iskandar Malaysia?s properties has also severely affected UEMS? property sales in Iskandar Puteri which plunged from RM1.9bn in FY13 to RM300m in FY15.

Near-term earnings visibility supported by RM4.1bn unrecognised revenue. This is equivalent to 2.7x FY17 property development revenue, and the group will not need to rely as much on land sales. Management has set a revised sales target of RM1bn for FY16 (RM2.4bn in FY15) in Aug 16, and it has achieved RM707m sales in 9M16 as only three projects worth RM558m GDV were launched in 9M16.

Diversifying beyond Iskandar Malaysia. While 75% of UEMS? land bank is located in Nusajaya, management has been trying to diversify beyond Nusajaya by launching more projects in the Klang Valley and overseas. Also, UEMS has been incorporating more affordable homes into its launches in view of the weak property market sentiment which has led to more aggressive marketing being undertaken to boost sales.

Valuation

We maintain our HOLD call for UEMS with a TP of RM1.00, based on a 70% discount to our RNAV. About 75% of UEMS? 13k acres of remaining land bank is concentrated within Iskandar Malaysia, and the group may not be able to monetise the deep value of its land there anytime soon given the weak sentiment towards Iskandar Malaysia properties, especially high-end condominiums.

Key Risks to Our View

Potential oversupply of high-end condos in Iskandar Malaysia. Property prices there are also comparable to more matured areas (KL and Penang), which may not be sustainable.

Source: Alliance Research - 01 Dec 2016