UEM Land Holdings Bhd (Apr 19, RM2.69)
Initiate coverage at RM2.72 with buy call, fair value RM3.52: As UEM Land Holdings Bhd (ULHB) is now the largest property stock on Bursa Malaysia by market capitalisation and landbank size, it is a strong candidate for inclusion as an index component of the FBM KLCI, which is due for review in June. With its inclusion, ULHB would be the only pure property stock in the index, which we believe will raise its profile and visibility, which would then clearly justify its premium valuation given that the FBM KLCI's top 30 stocks are typically used as a benchmark portfolio.
Previously, due to the company's lack of experience in niche/lifestyle integrated residential and commercial developments, the key concern of investors had been the execution risk. However, we believe the group's underlying execution risk has been reduced after its acquisition of Sunrise Bhd. Armed with its vast experience and track record in this area, coupled with the involvement of its major shareholder Datuk Tong Kooi Ong, Sunrise will be the key driving force in the development of ULHB's future projects.
Following a bilateral agreement signed in May 2010, the governments of Malaysia and Singapore agreed to move the KTM terminal station from Tanjung Pagar to Woodlands in exchange for six parcels of land in Marina South and Ophir-Rochor, which will be jointly developed by a 60:40 JV between the two countries' sovereign wealth funds Khazanah Nasional Bhd and Temasek Holdings. As Khazanah's property arm, we believe it is very likely ULHB will be appointed the key developer to undertake the project on behalf of Khazanah. This will be a significant earnings catalyst for the developer.
Our fair value of RM3.52 is based on one times realisable net asset value on a fully-diluted basis, assuming the full conversion of the company's redeemable convertible preference shares. With a more than 20% upside we initiate coverage on ULHB with a "buy". Despite its premium valuation over its peers, we believe that the stock's potential inclusion in the FBM KLCI and positive news from Iskandar Malaysia will be its upward re-rating catalysts. Due to its size and promising growth prospects, ULHB's liquidity is among the highest of all listed property stocks as foreign and local institutional interest has picked up, especially following its acquisition of Sunrise. — OSK Research, Apr 19
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