INVESTMENT HIGHLIGHTS

• 1HFY18 earnings below expectations

• Earnings to pick up in 2HFY18

• 1HFY18 new sales at RM663.8m

• Earnings forecasts reduced

• Maintain BUY with lower Target Price of RM1.18

1HFY18 earnings below expectations. UEM Sunrise Berhad (UEMS) 1HFY18 core net income of RM43.7m came in below expectations, meeting only 20% and 18% of our and consensus full year estimates respectively. The deviation could be mainly attributed to the slowerthan-expected progress billing of local projects.

Earnings to pick up in 2HFY18. UEMS reported headline net income of RM213.8m in 2QFY18 as earnings were ballooned by gain from land sales. Stripping out gain from land sales, core net income in 2QFY18 is estimated at RM24.3m, bringing 1HFY18 core net income to RM43.7m (+7.1%yoy). UEMS recorded lower progress billing in 1HFY18 as project development cycle are still at the early stages for Solaris Parq, Serimbun and Kiara Kasih. Nevertheless, 1HFY18 earnings chalked up positive growth of +7.1%yoy as 1HFY17 figures were restated lower. Note that UEMS restated its 1HFY17 figures due to adoption of MFRS 15 which has resulted in deferment on the recognition of land sales and unwinding the recognition of Australia projects. Meanwhile, unbilled sales of RM4.9b in 2QFY18 provides 3.3 year of earnings visibility. Looking ahead, we expect earnings in 2HFY18 to come in stronger as earnings contribution from Melbourne projects is expected to boost earnings in 3QFY18 and 4QFY18 upon completion of the projects.

1HFY18 new sales at RM663.8m. UEMS recorded new property sales of RM229.5m in 2QFY18, lower than new sales of RM434.m in 1QFY18. That brought total new sales to RM663.8m in 1HFY18, higher than new sales of RM391.7m in 1HFY17. New sales in 1HFY18 are within expectations, making up 55% of management sales target of RM1.2b. Meanwhile, key upcoming launches include Residensi Astrea (GDV: RM326.7m) in Mont’ Kiara, Eugenia (double storey terraced houses with GDV of RM54.8m) in Serene Heights Bangi, Parcel i6 (GDV: RM136.7m) in Southern Industrial and Logistics Clusters. UEMS will also continue its inventory monetisation campaign.

Maintain BUY with a revised Target Price of RM1.18. We revised downwards our earnings forecasts for FY18/19 by -8.6%/-11.3% to account for the lower than expected progress billing. Our TP is revised to RM1.18 from RM1.25 after widening RNAV discount to -48% from -45%. We maintain our BUY call on UEMS due to its attractive valuation of trading at -36% discount to latest NTA per share of RM1.42. Earnings outlook for 2HFY18 is expected to be stronger due to contribution from Melbourne projects. We also favour management’s strategy of focusing on Klang Valley to expand its presence in Central region of Malaysia.

Source: MIDF Research - 29 Aug 2018