UEM Land Holdings Bhd: Turnaround year of 2009

Reaffirm NEUTRAL

UEM Land Holdings (ULHB) 4Q09 results beat our expectation. 4Q09 earnings and pretax profit accounted for >100% of both ours and consensus full year estimates.

•  The stronger performance was attributable to a (i) higher number of strategic land sales and a (ii) write-back coupled with (iii) an adjustment to the carrying value of an associate, both amounting to RM27.3 million. Nevertheless, property development sales declined on a y-o-y basis due to the larger sales base in 2008, owing to recognized development via Limitless JV Haute Property Sdn Bhd.

•  We are maintaining our FY10/11 earnings as we need to see stronger evidence of progress of its projects, which had been slow in 2009. We reiterate our view that future earnings will continue to be supported by strategic land sales with the group’s landbank balance of about 9,000 acres. Land demand in Nusajaya will stride with the recovering global economy and improving domestic property market.

•  Reaffirm NEUTRAL with unchanged TP of RM1.88.

Turnaround performance in 4Q09. Earnings grew on the back of revived land sales in 4Q09 (Sept-Dec 2009). Some of the notable transactions were  (i) the invoked option sale agreement with Panaromic Industrial Dev S/B, which develops Nusa Cemerlang Industrial Park, (ii) land sales to UM Land  (Puteri Harbour) via its JV option and (iii) JV development with Malaysian Biotechnology Corp in SiLC. We understand that the Panaromic land option is to end by 2010, and the balance of the landbank is minimal.

Development slowed down in 2009. The development pace of Nusajaya had not accelerated as fast as anticipated in 2009. Apart from certain obvious developments on the residential properties (East Ledang and Ledang Heights) and the Marine Marinas in Puteri Harbour, most of the developments’ progress slowed-down. We believe the delay was due to the temporary absence of foreign participation and also the looming effect from the recent financial crisis. Nevertheless, we expect further developments to materialise in 2010 with the injection of fresh funds and developing partners going-ahead with developments amidst the recovering economy.

Funds are  in-place. Apart from the proposed RM970 million rights-issue, the group has also looked towards external financing to fund future developments in Nusajaya and pare down debt levels. Note that ULHB will be holding its EGM on Feb 25. We assume further details on the rights issue will be announced then.

Not totally reliant on Middle Eastern funds. Management shared that the  group is looking to expand foreign contribution beyond the known Singaporean and Middle Eastern funds. Some of the newly proposed target markets are investors from South Korea, Australia, Indonesia, UK and the EU. However, we have yet to see any committed participation apart from Pinewoods Studio (UK)

Substantial landbank balance. As-to-date, the group has about 9,000 acres  of landbank balance for either development of land sales or property development. The group is targeting up to 20% of land sales to contribute towards 2010 earnings. Note that ULHB is committed to more than merely land sales but development of existing vacant parcels as well. It currently is looking towards the sale of smaller plots eg: Puteri Harbour, which has a faster turn-around time.

Tipping point in 2012. Management shared that Nusajaya turnaround point would be visible from 2012 onwards. This takes into account the completion of vital transportation infrastructure namely the East-West Link and Coastal

Highway, both directing traffic volume into Nusajaya. Also, the completion of Iskandar Investment Bhd’s (IIB) Educity and completion of Phase II and II of Kota Iskandar will inject a significant population into Nusajaya. Management is targeting up to 20,000 residential properties housing a population of 100,000 by 2012. We are not discounting this prospect, taking cue from Cyberjayas’ growth story. In addition, IIB role in developing LegoCity and Medini will complement Nusajaya’s, which will lend some support in drawing FDIs as well as visitor volume in making Nusajaya a vibrant marketplace.

Future projects vital for earnings driver. ULHB has lined up to RM10.42b worth of new projects launched between 2010 to 2020 comprising of residential and commercial developments. We believe not only will it be vital to support earnings growth but also to ensure the nation’s first economic corridor is a success.

Reaffirm NEUTRAL with unchanged TP of RM1.88. Our TP is derived from a 75% discount to RNAV. The steep discount is due to the high-execution risk in relation to the completion of the economic corridor within the stipulated timeframe. The concentration risk of a landbank in a single geographical area remains significant.