UEM Sunrise Bhd (Sept 21, RM1.04)

Maintain hold with a higher target price (TP) of RM1 from 90 sen previously: UEM Sunrise enjoys the advantage of low land cost in Iskandar Malaysia as the master developer of Nusajaya. However, after a strong price appreciation of land and properties in recent years, the market has started to grapple with increasing property supply, especially high-end condos, which has been exacerbated by the aggressive entry of Chinese developers. The weak sentiment towards Iskandar Malaysia’s properties has also dragged UEM Sunrise’s sales significantly.

Near-term earnings visibility is supported by a RM3.8 billion unrecognised revenue. This is 2.5 times financial year 2015 (FY15) property development revenue, and the group would not need to rely as much on land sales. The management has set a RM2 billion sales target for FY15, compared with RM2.2 billion in FY14, but it has only achieved RM600 million sales in the first half of 2015 due to delays of some launches.

While 75% of UEM Sunrise’s landbank is located in Nusajaya, the management is looking to diversify beyond Nusajaya. One of the options would be land swap arrangements to leverage on its large land bank in Nusajaya, which we have not priced in at this point.

We have a “hold” call on UEM Sunrise but revised our TP to RM1, based on a 70% discount to our revalued net asset valuation due to the termination of the 524.4 million new shares issuance at RM1.47 per share to UEM Group Bhd as it has been replaced with the issuance of five-year redeemable convertible preference shares, convertible at RM1.60 per share from the 54th month onwards.

Given the high concentration of UEM Sunrise’s land bank in Iskandar Malaysia, the group may not be able to monetise the deep value of its land there anytime soon given the weak sentiment towards Iskandar Malaysia properties. Furthermore, there is no near-term rerating catalyst for the stock.

Key risks to our view include the potential oversupply of high-end condos in Iskandar Malaysia. Property prices there are also comparable to more matured areas, such as Kuala Lumpur and Penang, which may not be sustainable. As such, we see pricing risks in unsold inventories, and future projects need to be reconfigured in order to differentiate from competitors.

Iskandar Malaysia lacks critical mass. While infrastructure is in place, more economic drivers and crowd-pullers are required to improve vibrancy. — Alliance DBS Research, Sept 21

This article first appeared in The Edge Financial Daily, on Sept 22, 2015.

SHARE
RELATED POSTS
  1. UEM Sunrise inks partnership with Intermedika to promote healthy living
  2. UEM Sunrise appoints TRX City’s Datuk Azmar Talib as independent non-executive director
  3. UEM Sunrise lifts payout ratio, posts higher 4Q profit on land sales