Investment Highlights

• We maintain HOLD recommendation on UEM Sunrise (UEMS) with a higher fair value (FV) of RM0.77 (from RM0.60 previously). The increase in FV is driven by i) a lower discount rate of 40%, similar the level seen when UEMS’ share price was traded in FY16-FY19 to reflect the improving sentiments for Johor property market, particularly in Iskandar Puteri as well as a declining trend of unsold units (Exhibit 5) and ii) an upward revaluation of land banks in Iskandar Puteri. Our revised FV implies a FY24F P/E of 39x, 1 standard deviation above its pre-pandemic 2016-2019 median and a neutral 3-star ESG rating.

• 2 upcoming major catalysts for Iskandar Puteri include (i) the signing of memorandum of understanding for JohorSingapore Special Economic Zone (JSSEZ) in January 2024; and (ii) the potential revival of Kuala Lumpur-Singapore high-speed rail (HSR).

• The announcement of the details for JSSEZ will see the acceleration of industrial property development in Iskandar Malaysia. We expect higher launches and property prices in Iskandar Puteri in the subsequent years.

• Additionally, we may see a transformation of the landscape in UEMS's land near the High-Speed Rail (HSR) station with the introduction of Transit-Oriented Development (TOD) projects.These projects are anticipated to have significantly higher gross development values (GDVs) compared to traditional landed properties. Hence, we anticipate an upward revision in UEMS's GDV with the revival of HSR.

• UEMS’ 9MFY23 core net profit (CNP) of RM45mil came in below expectations, making up 46% of our earlier full year forecast and 53% of street’s estimate.

• The variance to our forecast was mainly due to lower-thanexpected revenue as a result of the tail end of existing ongoing projects (Exhibit 6), as well as higher-thanexpected operating cost given the increase in marketing cost incurred for new project launches.

• Hence, we lower our FY23F CNP by 12% to reflect a weaker revenue and higher marketing cost. Nevertheless, we believe that UEMS’s progress billings will catch up from FY24F onwards, driven by the contributions from an increase in new launches in FY23.

• YoY, the group’s 9MFY23 CNP fell 28% while revenue declined by 19%. These were mainly attributed to the tail end of ongoing projects, coupled with lower contribution from land sales in 9MFY23, which totaled RM127mil vs. RM246mil in 9MFY22.

• In addition, UEMS’s CNP margin decreased to 4.9% in 9MFY23 from 5.4% in 9MFY22 attributed to the higher marketing cost incurred for new launches.

• In 9MFY23, UEMS secured new sales of RM1.8bil (2.4x YoY), exceeding its FY23F sales target of RM1.5bil (Exhibit 3). The main sales contributors were its newly launched projects, namely The MINH and The Connaught One, as well as the en bloc sales of its Collingwood project. New launches made up 82% of the sales, while remaining sales came from completed inventories (9%) and ongoing projects (9%).

• Meanwhile, UEMS’ 9MFY23 launches of RM3.4bil (6.6x YoY) have surpassed its FY23F target of RM2.5bil. The key launches were The MINH (29%), Collingwood (26%) and The Connaught One (22%) (Exhibit 4). In December 2023, UEMS plans to launch Senadi Hills Phase 2B in Iskandar Puteri with a total GDV of RM77mil.

• The stronger-than-expected sales and launches were attributed to the recognition of the en bloc sales of its Collingwood project valued at RM874mil.

• To recap, UEMS disposed its 1.33 acres of land in Collingwood to Greystar Real Estate Partners and UEMS will serve as the developer for the project. The maiden contribution from the Collingwood project is expected to kick in in FY25. Excluding the Collingwood project, we anticipate UEMS's FY23F sales target/targeted launches to be close to management’s guidance of RM1.5bil/RM2.5bil.

• QoQ, UEMS’s CNP plunged 73% while revenue fell 14%. This was primarily due to lower recognition of land sales in 3QFY23 at RM31mil vs. RM69mil in 2QFY23. Besides, its CNP margin dropped to 2.2% in 3QFY23 from 7% in 2QFY23 due to higher recognition of project cost savings in the previous quarter (2QFY23).

• Nevertheless, CNP in 4QFY23 is expected to improve QoQ as management guided that the proceeds from disposal of equity interest in held in Roc-Union Propriety Limited (RM30mil) and 69 acres of land in Iskandar Puteri (RM89mil) with an estimated gain of RM20mil-30mil are expected to be recognised in the final quarter of FY23.

• Moving forward, we expect the group’s FY24F revenue and CNP to be largely supported by its unbilled sales of RM2.7bil (+1% QoQ), which represents a cover ratio of 1.7x of FY24F revenue (Exhibit 3).

• UEMS is currently trading at an unexciting FY24F PE of 41x, higher than its pre-pandemic 2018-2019 median of 23x. Hence, we see limited upside potential at this juncture.

Source: AmInvest Research - 16 Nov 2023