UEM Sunrise Bhd
(April 6, RM1.35)
Maintain neutral with target price of RM1.35: UEM Sunrise Bhd has announced that it is issuing 524.4 million new shares at RM1.47 each to UEM Group Bhd. This represents 11.6% of its existing share base of 4.53 billion shares and will ultimately raise RM770.9 million for UEM Sunrise. 

Note that UEM Group is a wholly-owned subsidiary of Khazanah Nasional Bhd and it holds a 66.1% equity interest in UEM Sunrise. The issue price of RM1.47 is based on a 10% premium to its five-day volume-weighted average price of RM1.336. The corporate exercise is expected to be completed in the third quarter ending September (3QFY15), and it needs to get approvals from Bursa Malaysia and UEM Sunrise shareholders.

Ten years ago, Bandar Nusajaya Development Sdn Bhd (BND) issued 450 million redeemable convertible preference shares (BND-RCPS) at RM1 each which were treated as part of settlement of an RM800 million loan by Khazanah at that time. BND is an indirect wholly-owned subsidiary of UEM Sunrise and the maturity of the BND-RCPS is Nov 27, 2015. The total amount needed by UEM Sunrise to redeem the whole BND-RCPS is RM901 million, assuming that it is done in June 2015. The amount has grown from RM450 million to RM901 million due to the effective yield of 7.5% attached to the BND-RCPS should it be redeemed. The shortfall of about RM130 million (RM901 million less RM770.9 million) will be satisfied by the disposal of property by BND to UEM Group which is expected to happen in 2QFY15.

UEM Sunrise’s rationale for the corporate exercise is that it will provide the group with the necessary funds to effect the redemption of BND-RCPS. In the event that the BND-RCPS are not redeemed, they will be automatically converted into BND shares upon maturity in November this year.

This will result in UEM Group (effectively Khazanah) having a direct stake in BND of approximately 21.8%. Given that BND is expected to significantly contribute to the future earnings of UEM Sunrise, the company has decided to raise funds for the redemption of the BND-RCPS. We think UEM Sunrise’s strategy should result in better long-term earnings as it keeps its 100% stake in BND intact.

UEM Sunrise’s net income of RM491 million is maintained as the proceeds raised are expected to be utilised in the near term, hence no cost savings. At earnings per share (EPS) level, FY15 EPS is reduced by 10.4% to 9.7 sen due to the additional 524.4 million shares or 11.6% of the share base to 5.06 billion. On the balance sheet impact, we expect net gearing to be reduced slightly from 0.22 times to 0.20 times due to an increase in equity by RM770.9 million.

Assuming the proposed share issuance goes through, UEM Group’s (effectively Khazanah) shareholding in UEM Sunrise is expected to increase to 69.6% (from 66.1%). Other major shareholders like Lembaga Tabung Haji (now 5.1%) and the Employees Provident Fund (now 5%) will see their stakes diluted to 4.5% each. We also expect other minority shareholders’ effective stakes to be reduced by about 10% due to the enlarged share base.

Our target price has been reduced by 10% to RM1.35 due to the increase in share base by 11.6% to 5.06 billion. The valuation methodology is unchanged based on 50% discount to fully diluted revalued net asset value. The near-term outlook for UEM Sunrise is unexciting as we believe its FY15 new sales are likely to continue to decline. However, its unbilled sales of RM3.9 billion should provide more than two years of earnings visibility. Having said that, UEM Sunrise’s share price downside is limited as its price-to-book value is currently at its five-year low of 0.99 times. We expect its share price to be supported at its book value of RM1.40. — MIDF Research, April 6

This article first appeared in The Edge Financial Daily, on April 7, 2015.