By Khairul Khalid
Despite the glut in Iskandar’s property market forcing it to realign its southern exposure, UEM Sunrise recently announced the RM42 billion Gerbang Nusajaya developments. Can it really move beyond Iskandar’s master developer status to turn around its sagging fortunes?
Business model: Although revenue increased 9.7% to RM2.66 billion, UEM Sunrise Bhd’s earnings for the full financial year 2014 (FY14) dropped 17% to RM493.93 million. This was attributed to the lower margin from land sales although it was mitigated by higher profit from property projects.
The company’s earnings for the fourth quarter ended Dec 31, 2014 (4Q14) had tripled to RM272.38 million mainly due to Gerbang land sales to FASTrack Iskandar Sdn Bhd for RM248.3 million and Scope Energy Sdn Bhd for RM522.7 million.
Earlier this month, the property developer revealed comprehensive development plans for Gerbang Nusajaya, the gateway to Iskandar Malaysia that includes commercial districts such as Nusajaya Tech Park, FASTrack Iskandar (an automotive hub), Signature Residences. Gerbang Nusantara.
The 1,841 hectare project has a gross development value (GDV) of RM42 billion over 25 years and will also feature lifestyle and retail parks, campus offices and residential precincts.
UEM Sunrise is the flagship property company for UEM Group, a wholly owned subsidiary of state investment arm Khazanah Nasional Bhd. It has landbanks in Kuala Lumpur, Negeri Sembilan and Johor. In KL, it is well known for its residential projects in Mont’ Kiara as well as Cyberjaya.
UEM Sunrise is the master developer of Nusajaya, one of the five flagship zones in the Iskandar Malaysia project in Johor.
Nusajaya covers approximately 23,875 acres, of which around 7,600 acres are owned by UEM Sunrise and at various stages of development. They include Johor’s new administrative centre Kota Iskandar, the Puteri Harbour waterfront development, Southern Industrial and Logistic Clusters (SiLC), Afiat Health Park and Gerbang Nusajaya.
The company also has projects in other countries such as Singapore, Australia, Canada and South Africa.
Shareholders and management: According a Maybank research report last week, UEM Sunrise’s majority shareholders are Khazanah Nasional with a 66.1% stake followed by Lembaga Tabung Haji with 5.1% and Employees Provident Fund (EPF) with 5%. It has a market capitalisation of approximately RM6 billion.
UEM Sunrise appointed Anwar Syahrin Abdul Ajib as its new managing director and chief executive officer (CEO) on Sept 1, 2014. He was formerly the group chief financial officer and group head, ports and logistics division at MMC Corporation Bhd.
Anwar replaced UEM Sunrise’s previous CEO Wan Abdullah Wan Ibrahim who passed away in February last year.
Wan was the company’s CEO since January 2006 (when it was still UEM Land Holdings Bhd) and led the company to listing on Bursa Malaysia in 2008. During Wan’s tenure, UEM Land bought Sunrise Bhd for RM1.39 billion in 2011 and was rebranded into UEM Sunrise Bhd in 2013.
Share performance:
Earnings forecast: At an Invest Malaysia 2015 session last week, UEM Sunrise’s CEO Anwar said that the company is targeting to match 2014’s sales of RM2.4 billion and 2013’s net profit of over RM500 million. The company also estimates its undeveloped land bank to have a GDV of RM103 billion.
What analysts think: Most analysts are cautious about UEM Sunrise’s prospects, mainly due to the soft property market overall and the company’s large exposure to Iskandar Malaysia, which is experiencing an oversupply, especially high-end residential properties.
A CIMB research report says that although UEM Sunrise’s new CEO’s relatively high targets are admirable, the company’s ability to execute remains uncertain. It cites the cautious outlook for properties in Iskandar Malaysia and Nusajaya.
“RM2.4 billion sales target is 20% higher than the indicative value of RM2 billion mentioned by management during its 4Q14 results conference call in February. Should UEM Sunrise manage to match FY13’s net profit of RM579 million, it would be 17% higher than our forecast and a 21% rebound from 2014’s figure,” said CIMB analysts.
Although it views these targets positively, CIMB says that “it remains to be seen whether the company can deliver in an environment of continued tough property market conditions.”
“The group missed all of its 2014 KPIs (key performance indicators). Missing them again in 2015 would be a big disappointment,” said CIMB.
According to a Maybank research report recently, UEM Sunrise is realigning its strategy to reflect current market conditions. There is an expected shift away from Nusajaya to lessen its dependency on Iskandar. Around 80% of UEM Sunrise’s total GDV is in Iskandar.
“Upcoming launches in Iskandar will be more towards landed residential and industrial properties to reduce direct competition with the Chinese developers in the high-rise property segment,” said Maybank.
Nevertheless, according to Maybank, UEM Sunrise’s landbank in Iskandar was secured at low valuations. This allows Iskandar’s master developer to be more flexible in pricing and product launches amid stiffer competition.
“Elsewhere, we expect a q-o-q (quarter on quarter) decline in 1Q15 sales on the lack of new property launches,” said Maybank. Nevertheless, UEM Sunrise has lined up more than RM2 billion worth of new launches for the next eight months and the developer is confident of hitting its sales target for FY15.
Maybank also says that there might be “potential surprises” from land sales. UEM Sunrise is said to be in talks for the disposal of a few parcels of land in Puteri Harbour, although no details are available at the moment, Maybank has forecast RM500 million and RM300 million worth of strategic land sales in FY15 and FY16 respectively.
StockStalk: Despite positives from its land sales and overseas markets, “cautious” remains the operative word for UEM Sunrise in 2015 and beyond.
The company’s twin targets of RM2.4 billion sales and RM579 million net profit for 2015 is ambitious, to say the least.
A lot will depend on the success of its plans to reduce dependency on Iskandar launches and shifting to non-Nusajaya projects. This will be a quite an undertaking because approximately 80% of its total GDV is now in Iskandar.
It is also focusing on landed residential and industrial properties in Iskandar instead of high-end condos that the Chinese developers such as Country Garden and Guangzhou R&F are already flooding the market with.
The company’s share price has plunged approximately 42% in the last 12 months. It is quite clear that its exposure in the southern economic region remains a drag on share price.
Ironically, although it has stated plans to focus on non-Nusajaya projects, it recently announced the RM42 billion Gerbang Nusajaya project in Iskandar. This may send mixed signals to investors expecting significant changes in its strategy. With too much at stake in Iskandar as a national project, is UEM Sunrise too entrenched in the southern region?
Many analysts and industry observers expect the glut in Iskandar to hamper growth in Iskandar’s property market indefinitely.
Therefore, potential investors in UEM Sunrise should pay close attention to the execution of a “re-strategising” plan that was proposed by its CEO last year and how fast it could come to fruition.
Investors will also have to bear in mind other external factors that are expected to come into play in the local property market such as interest rates, tighter lending policies by banks, rising costs of raw materials leading to margin erosion and effects of the recent implementation of GST (goods & services tax) on the property market.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KiniBiz makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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