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UEM Sunrise Bhd
(Oct 28, RM1.81)
Maintain outperform with target price of RM2.60:
UEM Sunrise, despite rebounding from a recent multi-year low, is still trading at sub-RM2 levels, which we believe is an attractive entry point. True, the slowdown in the Johor property market due to oversupply is worrying, but UEM Sunrise’s low holding cost (cheap land) and healthy balance sheet should help the group weather the current demand softness.

With the current market capitalisation (at circa RM8.3 billion against about RM10 billion in 2011), investors are effectively getting all of Sunrise Bhd for free, which was acquired in 2011 for RM1.4 billion.  The group’s maiden project in Melbourne (The Aurora, RM1.3 billion, 941 units), which was launched last week in Malaysia, has already seen 200 units booked out of the 341 released.

For the first half of financial year 2014 ending December (1HFY14), UEM Sunrise netted RM439 million in new sales, with 69% coming from non-Nusajaya. We understand the company aims to rake in about RM800 million from The Aurora in Melbourne and the rest from existing townships such as East Ledang, Nusa Idaman and Nusa Bayu in Nusajaya, Johor.

We believe The Aurora (selling at at A$400,000 [RM1.15 million] to A$1.2 million), which is located near RMIT University and linked by an underground tunnel to Melbourne’s central train station, could spring a positive surprise to counter the sales weakness in Nusajaya. As indicated earlier, UEM Sunrise has in the pipeline projects outside Nusajaya such as Serene Heights (Bangi), Sinaran Hills (Kajang) in Selangor and Solaris 3 and Angkasa Raya (KLCC). These projects alone have a gross development value of RM10 billion. As for the Nusajaya projects, we believe UEM Sunrise’s land, which is strategically located near the various hubs, should see demand picking up in the long term.

The company could also participate in more joint ventures, such as the one with Gamuda Bhd (485.6ha, Horizon Hills) and Kuala Lumpur Kepong Bhd ([KLK] 202.3ha) to unlock land value.

UEM Sunrise’s high exposure (about 70% of total land bank) in Johor has now obviously become a thorn in the flesh due to the difficult trading environment because of oversupply concerns and a crowded market. However, we believe the company should be able to ride out the current demand softness with the advantage of holding its land at low cost. Net gearing is healthy at 0.22 times. The recent price correction saw some RM2 billion of its market value wiped out since end-2013, which was more than what UEM paid to acquire Sunrise (acquired for RM1.4 billion).

Maintain “outperform” and target price of RM2.60, which is about a 20% discount to our realisbale net asset value.  — PublicInvest Research, Oct 28

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This article first appeared in The Edge Financial Daily, on October 29, 2014.

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