Investment Highlights

• We maintain our HOLD recommendation on UEM Sunrise (UEMS) with an unchanged fair value of RM0.37/share, based on a 60% discount to its RNAV and a neutral ESG rating of 3 stars (Exhibits 4 & 5).

• UEMS entered into a sale and purchase agreement with Nipponkey to acquire a 6.4-acre freehold land situated at Jalan Sultan Yahya Petra, Kuala Lumpur for RM384mil (Exhibit 1). We maintain our forecast and fair value, pending further clarity on the project on any revisions to the existing development order (DO).

• The acquisition will be satisfied by the transfer and disposal (in-kind payment) of lands in Gerbang Nusajaya, Iskandar Puteri (Exhibit 2) for a total consideration of RM148mil, with the remainder RM236mil funded by borrowings and/or internal funds.

• As at March 2022, UEMS has RM813mil in cash with a net gearing ratio of 0.5x. We expect the group’s gearing ratio to rise to 0.54x assuming that RM236mil of the total purchase consideration of RM384mil will be fully funded by debt.

• The acquisition price of RM384mil (RM1,380 psf) implies a cost-to-GDV ratio of 26%, which is higher than industry average land cost-to-GDV ratio range of 15–20%.

• Based on our channel checks, the asking price for commercial lands surrounding Jalan Sultan Yahya Petra ranges from RM1,100 psf to RM1,300 psf. Hence, we deem the acquisition price to be fair as the land comes with a DO for a mixed commercial development as per Exhibit 3.

• While the project’s specific details yet to be revealed, we believe there will be no material amendments to the existing DO. The DO has a development plot ratio of 1:7.38. Hence, with the land size of 278k sq ft, up to 2mil sq ft of gross floor area can be developed.

• The land acquisition is expected to be completed by 2HFY23. Meanwhile, the official project launch date is expected to be in FY24.

• The project, which will have an estimated gross development value of RM1.5bil, could potentially contribute up to 10% of UEMS’ earnings from FY24F to FY27F over the development period of 4 years.

• The land is not subjected to development of any affordable housing requirements. This will benefit both developers and buyers because there will be no necessity for developers to raise the pricing of its high-end houses to cross-subsidise the development of low-cost housing.

• Located in a prime and mature location, the land is infrastructure-ready and has good accessibility and connectivity. It is positioned near the Kuala Lumpur city centre, which is a 2-km drive away via Jalan Sultan Yahya Petra and Jalan Tun Razak, aside from its short distance to DUKE via the Semarak Interchange.

• As UEMS is currently trading at an unexciting FY23F PE of 15x near its pre-pandemic FY18-FY19 average, we see limited upside potential for this stock.

Source: AmInvest Research - 5 Aug 2022