Supply glut in Iskandar haunts UEM Sunrise

KUALA LUMPUR: UEM Sunrise Bhd, the largest landlord in the Iskandar region in Johor, has seen its share price shrink to only one-third of its peak at RM3.25 in May 2013.

The stock has been on a downhill trend for the past two years, sliding to RM1.15, mainly because of the mounting concerns over a supply glut in Iskandar as more developers jump onto the bandwagon, aggressively launching projects.

The supply glut of residential property is said to be created by aggressive Chinese developers in the southern state.

This ongoing issue still plagues the company, while analysts are continuing to cut their target prices for UEM Sunrise.

Terrence Wong, the head of Research at CIMB Investment Bank said that although UEM Sunrise’s results for the first quarter ended March (1QFY15) were broadly in line with expectations, he would choose other stocks over UEM Sunrise for the sole reason of overproduction in Iskandar Malaysia.

“Despite a rise in our RNAV (revised net asset value) estimate, our target price drops [to RM1.21] because we widen our RNAV discount from 50% to 60% to factor in the tough conditions in the property sector, particularly for Iskandar Malaysia. For exposure to the sector, we continue to prefer Mah Sing and EcoWorld.”

AmResearch concurs with the gloomy view, having recently downgraded its recommendation on UEM Sunrise. “We downgrade UEM Sunrise from ‘buy’ to ‘hold’, with a lower fair value of RM1.29 per share. In line with our more cautious outlook, we have also widened the discount attached to its net asset value per share (i e from 40% to 45%).

“Our revised outlook reflects the continued weakness in the Johor property market amid policy uncertainties — the most recent being the Johor government’s decision to freeze approvals of new serviced apartment projects in the state. Of all the property stocks, UEM Sunrise has the highest exposure in Johor; about 77% of its land bank is in this region.”

Last Thursday, UEM Sunrise chief executive officer Anwar Syahrin Abdul Ajib said the group is looking to widen its earnings base and shift away from its stronghold Iskandar Malaysia, as a measure to counter the supply glut of residential property.

“We see diversification of land bank as important because 77% of our land is in Johor. We still believe in the [Iskandar] story and [the] property [sector] there is big. But there is a downturn now and we just have to weather the storm.”

In particular, UEM Sunrise is looking to purchase land in the Klang Valley, Penang, Sabah and Sarawak with the RM500 million per year landbanking budget it has. Anwar added that from this point onwards, the group will be “very careful” about building in Nusajaya, and will focus only on product offerings which cater to buyers’ needs.

Analysts believe the group’s plan to look for other sources of earnings is its first step in the right direction, although its near-term impact may not be immediately visible.

On the other hand, Tan Siang Hin, an analyst at Public Investment Bank Bhd, believes that UEM Sunrise’s land still has upside potential in the long term due to its low average price per sq ft at less than RM15.

“If I’m an investor, I would look at the assets that the company has. Just do some reverse engineering: market cap over landbank. What we would get is that the cost of [UEM Sunrise’s] land is less than RM15 per sq ft, which I think is very cheap,” he commented. He has a contrarian “buy” call on the stock.

Tan compared UEM Sunrise’s land bank price (of less than RM15 per sq ft) to other plantation land in Johor which goes for between RM20 and RM30 per sq ft.

“[UEM Sunrise] hasn’t launched anything in the first half. So the performance of their sales will obviously come in the second half, when they launch more projects. But I know that they are going to launch more projects outside Johor.

“Our house is calling a ‘buy’ on the stock, although most other research houses have downgraded this stock, but the thing is the value is still there. Now the point [that UEM Sunrise has to focus on] is the execution and selling their products.

“Eventually, when they deliver in terms of sales and earnings, the gap between the value and price should be closed.”