Kepong land acquisition positive for UEM Sunrise

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KUCHING: Analysts are positive on UEM Sunrise Bhd’s (UEMS) acquiring land in Kepong from Datuk Bandar Kuala Lumpur at a price tage of of RM416.4 million.
UEMS, through its wholly owned subsidiary Sunrise Bhd had entered into a shareholders’ subscription agreement with Mega Legacy (M) Sdn Bhd (MLM) to subscribe for 500,001 shares in MLM for a total subscription price of RM279.3 million.
Simultaneously, MLM entered into a sale and purchase agreement for the acquisition of 72.73 acres of land in Kepong from Datuk Bandar Kuala Lumpur for a purchase consideration of RM416.4 million.
MIDF Amanah Investment Bank Bhd (MIDF Research) was positive on the acquisition as it would strengthen UEMS’s presence in Klang Valley and was in line with UEMS’ strategy of diversifying its presence from Southern Malaysia towards the central region.
The said parcels in Kepong are adjacent to the Kepong Metropolitan Park, located approximately 13km north west of KL city centre, it said.
“UEM Sunrise intends to replicate the success of Solaris Dutamas and Mont’ Kiara by undertaking a mixed development with an estimated gross development value (GDV) of RM15 billion with development period of 15 years on the said parcels,” it opined in a report yesterday.
“Meanwhile, connectivity of the said parcels will also be improved as two interchanges will be constructed connecting the said parcels to MRR II.”
MIDF Research said the move would leave a minimal impact on UEMS’ balance sheet as the share subscription will be funded via internal generated funds.
“We estimate net gearing of UEM Sunrise to increase to 0.5 times from 0.46 times as of end FY17,” it added.
The price-tag of the land of RM416.4 million — or RM131 per square feet — was attractive in the eyes of Kenanga Investment Bank Bhd (Kenanga Research) as this was well below the market valuation of RM950 million.
It saw that the initial 57 per cent of the land payment would take place within three months of MLM’s receipt upon meeting the CP of State Authority’s Consent for the transfer of the first parcel to MLM and the remaining 43 per cent would be in the form of payment in kind which alleviates balance sheet obligations.
UEMS will pay for its subscription in MLM (RM279.3 million), and assuming the exercise can be completed in 2019, this would increase FY19E net gearing to 0.38 times from 0.34 times, which is still at a healthy level.
This led Kenanga Research to be positive on the acquisition, but it forewarned that earnings accretion would only come beyond FY19.
“Not only is the price tag attractive, we also favour the type of land acquired as UEMS needed to diversify its landbank outside Johor and demand in Klang Valley, particularly in matured areas closer to KL city centre, has been relatively better than other areas,” it said.
“Given a very low land cost-to-GDV ratio of three per cent, which is extremely rare nowadays, we believe gross margins could range between 35 to 40 per cent, depending on design and construction complexity.
“Based on expected completion of the deal in early FY19, we believe the launch will likely take place towards the latter part of FY19 to FY20, which has no major earnings impact on FY18-19E earnings. Hence, we maintain our earnings estimates for now.”
Meanwhile, MIDF REsearch gathered that UEMS was looking to continue improve its cash flow via asset monetisation and inventory monetisation. UEM Sunrise recorded land sales of RM542 million in FY17 while UEMS will continue its asset monetisation exercise in FY18 to unlock value of its landbank.
For the time being, UEMS is focusing on clearing inventories and rolling out new projects prudently to avoid build-up of inventories and improve its cash flow. Note that inventories of UEM Sunrise increased marginally to RM610 million as at FY17 from RM585 million as at FY16.
Launches of property projects on the said parcels are expected to take place in FY19, hence MIDF Research maintained its earnings forecast for FY18. Management is maintaining its new sales target of RM1.2 billion for FY18.
“New sales in FY18 are expected to be driven by new planned launches with GDV of RM1 billion, Solaris Parq (GDV of RM760 million) in Dutamas and Mayfair (GDV of RM1.1 billion) in Melbourne and sale of completed projects.
“Note that 73 per cent of new planned launches in FY18 are in central region (Mont’ Kira and Bangi), in line with management’s strategy of focusing on Klang Valley.”