UEM Sunrise Bhd
(Dec 16, RM1.37)
Downgrade to “neutral” from “trading buy”, with target price of RM1.65: We have downgraded the property sector to “neutral”. We expect property transaction volumes to decline by 3% to 5% in 2015 on the back of slower economic growth and a high loan rejection rate. We also anticipate property prices to stay flat as developers would have difficulty passing on incremental costs in an environment of weakening demand. Buyers/investors and developers are likely to adopt a wait and see stance in monitoring market conditions in the first half of 2015, as the impact of the goods and services tax kicks in. For the stocks under our coverage, we estimate new sales to drop by an average of 10% to 20% year-on-year (y-o-y), -25% y-o-y in 2014 and +41% y-o-y in 2013.

The near-term outlook for Iskandar Malaysia in Johor remains challenging. We expect the ongoing housing glut, exacerbated by the incoming developments undertaken by foreign developers, to take a long time to be resolved. According to data from CB Richard Ellis, as at the first quarter of 2014, the existing supply of high-rise residential units in Iskandar stood at 31,082, while 28,874 units were under construction. This means that the existing supply will almost double in the next three to four years. Although the weakening of the ringgit should attract tourist spending from Singapore, we think the intention to buy properties as an investment (by taking advantage of the currency weakness) is not strong — as property market cooling measures are still in place. The high-rise segment would be particularly vulnerable due to the upcoming supply.

Although UEM Sunrise has diversified to overseas (Australia) to mitigate the downside in new property sales, being a proxy for Iskandar, the stock could be derated further in view of the slower economic growth ahead. We downgrade UEM Sunrise to “neutral” (from “trading buy”). While our revised target price downward to RM1.65, from RM2.16 previously, based on a larger 50% discount (from 40%) to realisable net asset value (RNAV), offers a 19.6% upside, we advise investors to avoid this stock over the immediate term, given the prevailing negative market sentiment. — RHB Research, Dec 16

This article first appeared in The Edge Financial Daily, on December 17, 2014.