As  we  have  downgraded  the  property  sector  to  NEUTRAL,  we  also downgrade  UEM  Sunrise  to  NEUTRAL,  with  a  lower  TP  of  MYR1.65 (19.6%  upside).  On  top  of  the  currently  weak  housing  market  in Iskandar,  the slower economic growth is likely to continue dampening the company’s  property  sales,  while  land  sales  may  also  be  lacking. We, therefore, expect FY16 earnings growth to be under pressure.  
 
Sector  downgrade.  We  have  downgraded  the  property  sector  to NEUTRAL. We  expect  property  transaction  volumes to decline  3-5% in 2015  on  the  back  of  slower  economic  growth  and  a  high  loan  rejection rate. We also anticipate property prices to stay flat as developers would have  difficulty  passing  on  incremental  costs  in  an  environment  of weakening demand. Buyers/investors and developers are likely to adopt a  wait-and-see  stance  in  monitoring  market  conditions  in  1H15,  as  the impact  of  goods  and  services  tax  (GST)  kicks in.  For the  stocks  under our  coverage,  we  estimate  new  sales  to  drop  by  an  average  10-20% YoY vs -25% YoY in 2014 and +41% YoY in 2013.

Iskandar a long-term story indeed. The near-term outlook for Iskandar remains  challenging. We  expect  the  ongoing housing glut, exacerbated by the incoming developments undertaken by foreign developers, to take a  long time  to  be  resolved.  According to  data  from  CBRE, as  at  1Q14, the  existing  supply  of  high-rise  residential  units  in  Iskandar  stands  at 31,082 units, while 28,874 units are under construction. This means that the existing supply will almost double in the next 3-4 years. Although the 
weakening  of  the  MYR  should  attract  tourist  spending  from  Singapore, we  think  the  intention  to  buy  properties  as  an  investment  (by  taking advantage of the currency weakness) is not strong – as property market cooling  measures  are  still  in  place.  The  high-rise  segment  would  be particularly vulnerable, due to the upcoming supply.  

Downgrade  to  NEUTRAL.  Although  UEM  Sunrise  has  diversified  to overseas,  ie  Australia  to  mitigate  the  downside  in  new  property  sales, being a proxy for Iskandar, the stock could be de-rated further in view of the  slower  economic  growth  ahead.  We  downgrade  UEM  Sunrise  to NEUTRAL (from Trading Buy). While our revised  TP of MYR1.65 (from MYR2.16), based on a larger 50% discount (from 40%) to RNAV, offers a  19.6%  upside,  we  advise  investors  to  avoid  this  stock  over  the immediate term – given the prevailing negative market sentiment.

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

UEM Sunrise (previously known as UEM Land) is a company under Khazanah Nasional. It is the developer undertaking developments in Nusajaya Iskandar. 

Recommendation Chart

Source: RHB