Khazanah buys Imperia Building from UEM Sunrise

UEM Sunrise Bhd 
(July 1, 99 sen )
Upgrade to buy with an unchanged target price (TP) of RM1.20: UEM Sunrise Bhd has announced that it is selling Imperia Building to UEM Group Bhd for RM137.8 million (inclusive of the RM7.8 million goods and services tax (GST). Imperia Building is a 16-storey office tower with a gross floor area of 476,732 sq ft in Puteri Harbour, Johor. 

We gather that Imperia Building is currently 98% done and it is expected to be completed by end-July. UEM Sunrise is expected to have a one-off gain of RM16.2 million from the sale of the building.

It is expected to be completed in the third quarter of this year. Note that the deal is a related party transaction as UEM Group is a wholly-owned subsidiary of Khazanah Nasional Bhd and holds a 66.1% equity interest in UEM Sunrise. Proceeds raised will be utilised to redeem part of the 450 million redeemable convertible preference shares (RCPS) issued by Bandar Nusajaya Development Sdn Bhd to UEM Group. 

Recall that Bandar Nusajaya is an indirect fully-owned subsidiary of UEM Sunrise and the maturity date of the RCPS is Nov 27, 2015. The total amount needed by UEM Sunrise to redeem the RCPS was RM901 million by end-June 2015. This has been completed with RM130 million coming from the current sale of Imperia Building and another RM771 million raised from a share issuance to UEM Group as per the April announcement. 

We are “neutral” on the deal as it is not expected to have an impact on financial year ending Dec 31, 2015 (FY15) and FY16 core net incomes. However, FY15 net income is raised by RM16.2 million or 3% to RM507 million to impute the one-off gain arising from the disposal of the Imperia Building. 

Excluding the deal, the outlook for FY15 is unexciting for UEM Sunrise as we expect new sales to be lower this year at RM1.95 billion (against FY14’s RM2.44 billion). 

We have upgraded UEM Sunrise to “buy” as there is a possibility that Khazanah may privatise UEM Sunrise due to its deep valuation currently. In our view, the market may have accorded too deep a discount on the stock. 

Note that UEM Sunrise’s share price tumbled 69% from its peak of RM3.10 on July 18, 2013 while we expect its core earnings per share to only decline by 28% to 9.7 sen in FY15 (against 13.39 sen in FY13). It is also at a 30% discount to its book value of RM1.40. We also like management’s initiative to diversify its land bank from Johor as this should provide more stable earnings in the future should this materialise. — MIDF Research, July 1

This article first appeared in The Edge Financial Daily, on July 02, 2015.