UEM Sunrise to diversify landbank beyond Nusajaya

UEM Sunrise Bhd (May 22, RM1.15)

Downgrade to “hold” with a target price (TP) of RM1.29: We downgrade UEM Sunrise Bhd (UEMS) from “buy” to “hold”, with a lower fair value of RM1.29 per share.

In line with our more cautious outlook, we have also widened the discount attached to its net asset value (NAV) per share (i e from 40% to 45%).

Firstly, our revised outlook reflects the continued weakness in the Johor property market amid policy uncertainties — the most recent being the Johor government’s decision to freeze approvals of new serviced apartment projects in the state.

Of all the property stocks, UEMS has the highest exposure in Johor; about 77% of its landbank is in this region.

We believe management’s move to diversify its land bank beyond Nusajaya — with an immediate focus on landed homes in Puteri Harbour and Gerbang Nusajaya — is a step in the right direction.

We also feel the same about its successful maiden launch of Nusajaya Tech Park (joint venture with Singapore-based Ascendas Pte Ltd).

However, the near-term impact from both moves may not be immediately visible.

Secondly, there is less clarity on UEMS’ earnings outlook in the near term amid a more challenging property market.

Embedded in its base profit target of RM500 million are some potential strategic land sales from Southern Industrial and Logistics Clusters (SILC) (Phase 3) and Puteri Harbour.

Indeed, first quarter of financial year 2015 (1QFY15)’s net profit of RM53 million only makes up about 10% of the base target.

Any delays in strategic land sales could cause a shortfall in its profit target, we reckon, although earnings could pick up in the second half (2H) once construction works for its Aurora Melbourne Central project begins in June.

To be conservative, our revised earnings are about 7% lower.

Earnings fell 14% year-on-year (y-o-y) partly due to commission paid for this project, which will likely impact the 2Q as well.

The top three major revenue contributors were Teega (RM109 million) project in Johor, and Summer Suites (RM51 million) and Arcoris (RM39 million) projects in the central region.

Thirdly, new property development sales could be flattish this year with a base target of RM2 billion (FY14: RM2.4 billion).

1QFY15 sales were RM390 million, the bulk of which came from Aurora Melbourne (RM251 million).

Likewise, pre-sales momentum — bar Australia — remains muted with no launches in the quarter under review.

The launch of The Conservatory project (gross development value: RM608 million), UEMS’ second Australian project, could be by the end of the 3Q or 4Q of 2015.

From a portfolio perspective, sentiments toward the stock could be further dented by its recent removal from the MSCI Malaysia index in the absence of a stronger turnaround in pre-sales or fresh catalyctic projects. — AmResearch Sdn Bhd, May 22\

This article first appeared in The Edge Financial Daily, on May 25, 2015.