Credit Update: JS-SEZ a tailwind for UEM Sunrise sizeable landbank in Johor

Highlights:

• UEM Sunrise is a property developer in Malaysia and a property arm of UEM Group, a fully owned subsidiary of Khazanah Nasional Berhad.

• Revenue and operating profit slightly declined in 3Q24 while operating margin remains good at 19.1% from project cost savings and higher margin from land sales.

• Credit supported by cash holdings and unbilled sales of RM2.9 billion providing earnings visibility for the next there years. Implicit support from Khazanah Nasional Berhad and AA- credit rating is supportive of near-term refinancing.

• Slightly higher average cost of borrowings at 5.0% is covered by operating profit with interest coverage of 1.6x and substantial cash holdings of RM1.3 billion.

• Overall, UEM Sunrise’s credit risk remains low in the short to medium term, supported by stable margins, high take-up rates, manageable leverage, and robust refinancing capabilities.

Background

UEM Sunrise, established in 2008 is an investment holding company and a well-known property developer in Malaysia. UEM Sunrise is an investment holding company whose key subsidiaries are mainly involved in property development. UEM Sunrise operates as the property arm of UEM Group, which is a fully-owned subsidiary of Khazanah Nasional Berhad – a sovereign wealth fund of the government of Malaysia.

UEM Sunrise is the master developer of Iskandar Puteri in Johor and has undertaken several notable developments ranging from medium to high end residential and commercial properties in Malaysia and has recently started venturing into property development in Australia.

Revenue and operating profit slightly declined but on track to hit sales target

In 9M24, the group achieved RM929 million sales, translating to 93% of RM1 billion sales target for the year. This was contributed from sales in the central region, mainly from notable projects such as The Minh in Mont Kiara, The Connaught One and Residensi Zig, Kiara Bay.

Table 1: Financial Performance

While being close to hitting their sales target for the year in just 3 quarters is commendable, we noted that their sales number has slowed by ~50% from the prior year sales of RM1.78 billion. This can be attributed to modest project launching of gross development value (GDV) RM800 million compared to RM3.6 billion in previous year which is in line with their current strategy of operating efficiently while maintaining launch discipline. As of 3Q24, the group has an unbilled sale of RM2.9 billion which provides earnings visibility as it is realised over the next three years.

The group saw improvement in their operating margins in FY2023, largely due to improved operational efficiency as project cost savings contributed positively. Additionally, higher margins from land sales also contributed positively to margins in FY2023

Nevertheless, the take up rate of the group’s project looks promising, achieving more than 98% take up rate for their projects which are at the tail end of construction and an overall take up rate of 70% for on-going projects. Furthermore, their latest projects in Iskandar Puteri showed strong interest with three of their latest projects with a combined GDV of RM 499 million fully taken up.

The group is also moving on with their landbank rebalancing strategy. Notably, 94% of their current landbank is in the Southern Region, namely Johor and only around 6% lies in the Central Region. As such, moving forward, UEM will look to monetise non-strategic assets in the southern region and securing new land in the central region.

In addition, despite slowing sales, the group is able to supplement its earnings with sales of non-strategic lands in Iskandar Puteri, Johor totaling RM113 million. We believe the positive prospects for property projects in Johor where the group has a sizeable landbank will be able to contribute significantly to the group in the future, be it through land sales or development.

UEM Sunrise’s presence in Australia

UEM Sunrise completed two apartment projects in Melbourne namely Aurora and Conservatory, achieving take up rate of 100% and 96% respectively. Following the success of these two projects, UEM has recently received planning approval for their RM1.2 billion build-to-rent (BTR) project in Collingwood and development approval for a mixed-used development in Perth with a GDV of RM1.3 billion. The Collingwood project is expected to start in mid-2026 and is fully sold to US-based Greystar Real Estate Partners, eliminating demand and funding risk as UEM Sunrise will act as the project manager.

Debt levels remain consistent with decent cash holdings and limited refinancing risk

Table 2: Selected credit ratios

As of 3Q24, debt levels remained consistent with previous years at RM4.15 billion. The group short-term liquidity remains sound with cash balances covering short-term borrowings by 1.47x. The group continue to keep net gearing ratio at around 50% since FY2020 and we expect it to continue to remain at that level.

Over the years, we see the company’s average cost of borrowings increasing to 5.0% from 4.2% in 2020, which is as expected as the interest rate rose in the years after the pandemic from a low in 2020. Considering that around 95% of their debt facilities are in the form of sukuks, it is given that the group will see higher interest expense when they issue new sukuk to refinance in a rising rate environment. However, the group operating profit is able to provide a cover for their debt servicing requirements with a 1.57x cover despite increasing interest cost in the recent year.

Most of UEM Sunrise’s debt is in the form of sukuk, with less than 10% debts as term loans or revolving credit facilities.

We believe UEM Sunrise’s refinancing ability is quite strong, underpinned by their sizeable assets, high take up rate of its property projects and implicit parental support from UEM Group and Khazanah Nasional (sovereign wealth fund of Malaysia). The group is very likely to continue refinance its debt of RM 2.1 billion in 2025 and 2026 through issuance of new sukuk.

Chart 1: Upcoming debt maturity (RM billion)

Related Risk

The property industry is a highly competitive industry and the Group faces competition from various industry players. Factors such as availability of strategic locations, reasonably priced landbank, and overall quality of development may play a part in determining demand of UEM’s property in this competitive landscape.

Furthermore, the overall demand for residential properties will generally be affected by the economy with a weakening economy and purchasing power negatively impacting demand for property and may also lead to project delays which will impact UEM’s sales, revenue recognition and cash flow.

Our Thoughts

We continue to be positive on UEM Sunrise’s credit as one of the top property developers in Malaysia. Their track record of successful property developments and positive responses from most of their launches showcases UEM Sunrise as a trusted property developer in Malaysia.

While their sales have dipped in FY24 due to slow launches, their take up rate shows strong demand for launches from the developer. Additionally, their significant landbank in Johor and its status as the master developer of Iskandar Puteri (a flagship zone of JSSEZ) serves as a tailwind for UEM to capitalise on the momentum for future growth.

On the credit front, we are optimistic with their ability to refinance their upcoming maturities given their existing programme and relatively strong credit, underpinned by their liquidity and implicit support from their parent. Unbilled sales of RM2.9 bil which will be realised over the next three years is also supportive of their upcoming cash flows for debt servicing.

Overall, UEM Sunrise’s credit risk remains low in the short to medium term, supported by stable margins, high take-up rates, manageable leverage, and robust refinancing capabilities.

Given all that, bondholders of UEM Sunrise can continue to hold as we remain positive on the Group repayment capabilities. Table 3 below shows the bond details on Bond Express for investors’ references:

Table 3: UEM Sunrise’s Bonds on Bond Express