UEM Sunrise will issue 524m new shares at MYR1.47 to UEMG to redeem the convertible preference shares amounting to MYR901m held by the latter. Maintain NEUTRAL but with a lower TP of MYR1.42 (3% upside). We estimate the share issuance to dilute our FY15-17 EPS forecast by 3-10%, and UEMG/Khazanah Nasional’s stake in UEMSunrise’s to increase to 69.6% from 66.1%.

Share issuance to UEM Group. UEM Sunrise announced its proposed issuance of 524.4m new UEM Sunrise shares at an issue price of MYR1.47 to UEM Group (UEMG). This is to redeem the 450m convertible preference shares (RCPS) held by UEMG, previously issued by Bandar Nusajaya Development (BND), a wholly-owned subsidiary of UEM Sunrise. BND owns all the land in Nusajaya under UEM Sunrise. The RCPS were issued in 28 Nov 2005 as part settlement of the outstanding loan of MYR800m previously granted by Khazanah Nasional, the holding company of UEMG, which was then transferred to UEMG via a substitution certificate. Assuming all the RCPS are redeemed end-Jun 2015, the total redemption amount would be MYR901m, including the aggregate of all dividends. If the RCPS are not redeemed, they will automatically be converted into BND shares upon maturity on 27 Nov 2015, resulting in UEMG having a 21.8% direct stake in BND.

11.6% increase in share base. Given the importance of BND to UEMSunrise’s long-term potential, it make sense for the latter to redeem the RCPS. As the company would like to preserve its future debt headroom for working capital and expansion purposes, management has decided to issue new shares to UEMG. UEM Sunrise is expected to raise MYR770.9m from the share issuance, and the remaining amount of the redemption will likely be settled via a disposal of property in 2Q15.Forecasts. The proposed share issuance is conditional upon the approval of Bursa Malaysia and shareholders of UEM Sunrise. The exercise is expected to be completed by 3Q15. As a result of the larger share base, our FY15-17 EPS estimates are diluted by 3-10%.Maintain NEUTRAL. Correspondingly, given the lower RNAV/share, our TP is reduced to MYR1.42 (from MYR1.50), based on an unchanged 55% discount to RNAV. Maintain NEUTRAL.