UEM Land standing on the shoulders of giants

UEM Land Holdings Bhd (July 11, RM2.74)
Upgrade to buy at RM2.78 with revised target price of RM3.44 (from RM2.86): The recently announced Khazanah Nasional Bhd-Temasek Holdings joint venture (M+S Pte Ltd) to develop projects worth RM34 billion in Singapore and Malaysia should encourage more participation by Singapore property developers in Iskandar Malaysia. Most importantly, UEM Land stands to be the main beneficiary of this JV. The group will participate in the development in Marina South and Ophir-Rochor in Singapore.

We upgrade our target price from RM2.86 to RM3.44 (10% discount to realisable net asset value (RNAV) per share) as we have clearer visibility of its future earnings. Most importantly, we believe the JV between the two sovereign funds will positively impact Iskandar going forward, and UEM Land is the direct proxy and beneficiary of this event. Upgrade to "buy".

The estimated gross development value (GDV) of the development in Marina South (two blocks of office towers and residential towers each) of about RM27 billion, with a permitted gross floor area (GFA) of up to 3.7 million sq ft, indicates a floor selling price of RM6,000 psf or S$2,500 psf. UEM Land will work with Singapore's Mapletree Investments Pte Ltd to oversee the marketing and development of the project in Marina South.

We gather that UEM Land will also work with Singapore-based CapitaLand Ltd to oversee the Ophir-Rochor project. This project is estimated to have a GFA of 1.72 million sq ft and a potential GDV of RM7.4 billion, or S$2,000 psf. Construction is due to start in June 2012 and complete in mid-2016.

M+S, which is 60:40 owned by Khazanah and Temasek, will take charge of developing land parcels in Marina South and Ophir-Rochor in Singapore. Pulau Indah Ventures Sdn Bhd, which is a 50:50 joint venture between Khazanah and Temasek, will develop projects in Iskandar Malaysia in Johor.

Malaysia and Singapore announced the land swap deal in September 2010 and now it has materialised. UEM Land will be involved in marketing and developing both projects in Marina South and Ophir-Rochor. Moreover, we believe the incorporation of a Singapore subsidiary under Sunrise's brand could be a prelude to potential development contracts for these projects. Assuming UEM Land taking up 60% of both developments, our RNAV could potentially increase by 25 sen from RM3.57. Both the developments contribute about 44 sen to our estimated RNAV per share.

With UEM Land's huge landbank in Johor and Sunrise's strong capability in developing high quality products, the merged entity could enhance and expedite the development of Nusajaya township in Johor.

The commitment from the Singapore government to jointly develop the wellness township in Medini is a positive catalyst in attracting more investors to Iskandar. Hence, it reinstates our view on asset reflation and we expect narrower land premium between Iskandar and Singapore. Also, the terminating stations of the Rapid Transit System which have been identified to be in the vicinity of JB Sentral and Republic Polytechnic in Woodlands (target operation by 2018) would also serve as a catalyst to improve the property sentiment in Johor.

We raise our FY11 to FY13 net profit forecasts by 26%, 25% and 28% after factoring in the latest project status and unbilled sales from Sunrise. We are 6% and 4% higher than consensus for FY12 and FY13. We have not factored in both the Singapore developments as there will be no material impact on earnings for FY11/FY12. However, we do see earnings upside in the next five years from the project management.

The key risk to our forecasts is the timing and take-up rates of projects.

The share price should react on positive news flow from the JV and more details on UEM Land's participation in both the Marina South and Ophir-Rochor developments. — UOBKayHian, July 11