Strong sales replenishment critical for UEM Sunrise’s earnings momentum

UEM Sunrise Bhd (Nov 12, 76 sen)

Upgrade to buy with a lower target price (TP) of 85 sen: Notwithstanding the weak sentiment towards Iskandar Malaysia’s properties, UEM Sunrise Bhd’s share price has plunged to an attractive level, at a mere 0.4 times its price-to-book value and 0.25 times its price-to-revised net asset value that is unjustified, in our view. 

UEM Sunrise’s vast land bank of 12,800 acres (5,180ha), of which 75% is in Johor, has been heavily discounted by the market which completely belies the real value of the land. Meanwhile, earnings visibility remains supported by its RM5 billion unbilled sales, anchored by its Australian projects. Therefore, we upgrade UEM Sunrise to “buy” with a revised TP of 85 sen given its compelling valuation.

Our earnings forecast is lower than consensus, probably due to our more conservative stance on the property market in Iskandar Malaysia. Strong sales replenishment is critical to sustain UEM Sunrise’s earnings momentum.

Stronger-than-expected property sales replenishment will convince investors the inherent quality of its land bank. Also, more land disposals could crystallise the deep value of its land bank and reward shareholders with dividends.

As 75% of UEM Sunrise’s land bank is located in Iskandar Malaysia due to its role as the master developer, a recovery in the sentiment towards the property market in the area will be the much needed catalyst for the company.

Despite the weak sentiment in Johor, UEM Sunrise’s vast land bank at low cost will allow the group to launch more affordably priced landed properties which remain in demand.

Key risks to our view include a potential oversupply of high-end condominiums in Iskandar Malaysia. Property prices there are also comparable with more matured areas (Kuala Lumpur and Penang), which may not be sustainable. — AllianceDBS Research, Nov 12

This article first appeared in The Edge Financial Daily, on Nov 13, 2018.

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