• NEUTRAL, new MYR0.28 TP from MYR0.22, 12% upside. We expect the property sector to see a more sustainable recovery from 2023 onwards. In our view, the risk of political uncertainties is now decreasing post 15th general election (GE15) in Nov 2022, while the pace of interest rate hikes next year is likely to be much slower as inflationary pressure gradually eases. Given its proxy as an Iskandar property market play, UEM Sunrise could also be a prime beneficiary if the Malaysia My Second Home (MM2H) programme is revived – which rationalises our TP increase.

• Improving market sentiment ahead. The conclusion of GE15 seems to have provided the market with fresh catalysts, and the risk of political uncertainties is gradually dissipating. At the same time, the interest rate upcycle is possibly near its end, and may likely peak in 1Q23-2Q23. With much of the rate hikes likely frontloaded, the pace of increase (in interest rates) is expected to decelerate in 2023. In our view, the sector has probably fully priced in the negative impact of labour shortage issues, interest rate hikes and rising inflationary pressure. Concerns on some of these issues should be over very soon, as developers/contractors will start receiving new batches of foreign workers in a few months.

• Potential beneficiary if MM2H is revived. UEMS could be a potential beneficiary if the MM2H programme undergoes a review and requirements for qualification are toned down. Based on recent news flow, the Johor State Government will propose to the Housing Ministry to revive the MM2H programme as part of the efforts to ease the residential overhang issue in the state. Although the new government has yet to make any comments and announcement, as a proxy for the Iskandar property market, we think UEMS will benefit if the authority starts introducing incentives to encourage the return of foreign property purchasers.

• Likely more launches in 2023. While UEMS is expected to miss its MYR1.5bn sales target in 2022, we think property sales in 2023 may increase, driven by a few major launches that were previously held back due to delay in authorities’ approval. These include The Minh MK 31 plot 1 (GDV: MYR950m) and Taman Connaught One (GDV: MYR740m). The Collingwood project in Melbourne (GDV: MYR790m) may also be realised this year as management is negotiating an off-take agreement.

• Valuation. As we expect the property sector to see a more sustainable recovery in 2023 and the Iskandar property market may benefit from the potential revival of MM2H, our new TP is now based on a 85% discount to RNAV (from 90%). Our TP also incorporates a 2% ESG discount applied on intrinsic value, given our in-house derived score of 2.90 for the company.

Source: RHB Research - 4 Jan 2023