Highlights
- UEM sunrise has returned to profitability in 1Q2022, registering a RM19.2 million in profit after tax - a significant rebound from RM4.3 million loss in the previous comparative quarter (1Q2021).
- Its unbilled sales stood at RM2.2 billion as of end-March 2022. The bulk of revenue would come from the higher-margin development in Klang Valley, offering a strong earning visibility through 2023.
- However, potential downside arising from any reversal in the economic direction and/or a resurgence of new COVID-19 variant might pose challenges to the company’s operating performance.
In this article, we will be discussing about UEM Sunrise's plan to raise RM300.0 million under the RM4.0 billion Islamic commercial paper and Islamic medium term notes programme (ICP/IMTN-3). We note that the proceeds from this issuance shall mainly be utilised to refinance the sukuk obligations under the existing ICP/IMTN-1 and ICP/IMTN-2, maturing in 2022 as well as other shariah-compliant purposes. The consolidated leverage (debt-to-equity (DE) ratio) does not exceed 0.75x.
The abovementioned programmes (ICP/IMTN-1, ICP/IMTN-2 and ICP/IMTN-3) carry MARC-1IS /AA-IS with a stable outlook by MARC Ratings Berhad.
Issuer background
UEM Sunrise is an investment holding company, whose key subsidiaries are mainly involved in property development and
investment.
Established in August 2008, UEM Sunrise operates as the property
arm of UEM Group of which is fully-owned subsidiary of Khazanah Nasional Berhad
(Khazanah) – a sovereign wealth fund of the government of Malaysia.
Exhibit 1: Shareholding structure (as of December 31, 2021)
Source: UEM Sunrise
The Issuer is the master developer of Iskandar Puteri flagship zone in Johor. It has undertaken several notable developments ranging from medium- to high-end residential and commercial properties. Following its acquisition of Sunrise Berhad in 2011, they have also engaged in high-end high-rise residential developments in the Klang Valley.
Financial performance
Exhibit 2: Financial highlights
| FYE December 31 | 1Q2022 | 1Q2021 | 2021 | 2020 | 2019 | 2018 | 2017 |
| Revenue | 416.5 | 252.7 | 1,184.5 | 1,136.9 | 2,909.5 | 2,044.0 | 1,860.6 |
| Operating profit | 52.7 | 26.1 | -82.2 | 2.2 | 479.4 | 476.0 | 249.2 |
| Profit/(loss) before tax | 35.8 | -0.5 | -213.9 | -195.3 | 381.8 | 416.0 | 201.7 |
| Operating profit margin (%) | 12.7% | 10.3% | -6.9% | 0.2% | 16.5% | 23.3% | 13.4% |
| CFO | 16.8 | -57.2 | -51.6 | -101.4 | 1,638.40 | 104.8 | -175.9 |
| CFO interest coverage (x) | 0.50 | n.m. | nm. | n.m. | 8.39 | 0.54 | n.m. |
| Total borrowings | 4,211.0 | 4,205.0 | 4,205.0 | 4,093.4 | 3,386.9 | 4,683.5 | 4,219.7 |
| Shareholders' equity | 6,835.3 | 6,796.1 | 6,796.1 | 6,908.0 | 6,901.6 | 7,264.3 | 7,057.3 |
| Cash and cash balances | 812.6 | 853.0 | 858.0 | 1,303.2 | 1,057.8 | 1,128.3 | 933.2 |
| DE ratio (x) | 0.62 | 0.62 | 0.56 | 0.56 | 0.44 | 0.63 | 0.58 |
| Net DE (x) | 0.50 | 0.49 | 0.49 | 0.38 | 0.30 | 0.48 | 0.45 |
CFO - Cash flow from operations
UEM Sunrise’s operating and financial performance have, not surprisingly, been weighed down by the COVID-19 crisis. The intermittent movement control orders and uneven phases of recovery in response to resurgence of infections throughout 2020 and 2021, have led to a stalled construction progress as well as retail operations. Additionally, the Group reported a delay in the settlement of international project (i.e., Victoria, Australia) as well as impairment losses in end-2021. As a result, its profitability has been in the red territory for the last two consecutive years (2020 and 2021).
Entering 2022, the Group saw an improvement in its operating performance, in line with the gradual ease of COVID restrictions and near-normal economic environment. This has been reflected by a 65% y-o-y increase in revenue to RM416.5 million in 1Q2022 compared to the comparative quarter last year (1Q2021). The higher revenue was mainly driven by higher progress billings due to the resumption of construction progress of local developments.
Overall, the Group’s earnings growth is deemed positive as reflected by a reversal in RM19.2 million in profit after tax in 1Q2022, from a RM4.3 million loss in the previous comparative quarter (1Q2021). The better earnings position in the current quarter was also contributed by a higher foreign exchange gains due to improvements in the Australian dollars and the South African Rands and improved share of results of joint ventures and associates.
As of end-March 2022, the Group has unbilled sales of RM2.2 billion with the bulk coming from higher-margin development in the Klang Valley (i.e., Residensi AVA), which are now in mid-completion stages. This should offer a strong earning visibility through 2023 for the company.
Capital structure
| FYE December 31 | 1Q2022 | 1Q2021 | 2021 | 2020 | 2019 | 2018 | 2017 |
| Debt-to-OPBITDA (x) | 33.2 | 70.8 | n.m. | 68.5 | 6.4 | 9.3 | 15.4 |
| DE ratio (x) | 0.62 | 0.62 | 0.56 | 0.56 | 0.44 | 0.63 | 0.58 |
| Net DE (x) | 0.5 | 0.49 | 0.49 | 0.38 | 0.3 | 0.48 | 0.45 |
| Total borrowings | 4,211.0 | 4,205.0 | 4,205.0 | 4,093.4 | 3,386.9 | 4,683.5 | 4,219.7 |
| Shareholders' funds | 6,835.3 | 6,796.1 | 6,796.1 | 6,908.0 | 6,901.6 | 7,264.3 | 7,057.3 |
| Cash and cash balances | 812.6 | 853.0 | 858.0 | 1,303.2 | 1,057.8 | 1,128.3 | 933.2 |
OPBITDA - Operating profit before interest, tax, depreciation and amortisation
In 1Q2022, total borrowings stood at RM4.2 billion. The borrowings are mainly dedicated for company's commitment towards its land acquisition plans. According to reports, it acquired 6.39 acres of prime freehold land at the intersection of Jalan Sultan Yahya Petra (formerly known as Jalan Semarak) and Jalan Padang Tembak, Kuala Lumpur for a total consideration of RM384 million. The Group's DE ratio registered at 0.62x as of end-March 2022 (2021: 0.56x), below the covenanted level of 1.00x.
As of end-March 2022, net DE has increased slightly to 0.50x from 0.49x in 2021. Base on the rating agency’s report, net DE is expected increase from the current level of 0.50x to around 0.56x over the near term as the Group requires about RM300 million to fund ongoing and planned land acquisitions in 2022. The expected level, however, is still comparable to its similar-rated peers.
The table below depicts a list of selected Issuers for bond comparison.
Exhibit 4: bond comparison
| Bond name | Issuer | Rating | Yield to maturity | Tenure (years) |
| UEMSMK Jul2025 Corp (MYR) |
UEM Sunrise Berhad | AA-IS (MARC) | Indicative 5.18% (MGS+170bps) | 3.00 |
| UEMSMK Jul2027 Corp (MYR) | UEM Sunrise Berhad | AA-IS (MARC) | Indicative 5.47% (MGS+170bps) | 5.00 |
| ENCORP SYSTEMBILT SDN BHD | Encorp Systembilt Sdn Bhd | AA1 (RAM) | 3.70% | 5.77 |
| ENCORP 5.450% 18.11.2027 | Encorp Systembilt Sdn Bhd | AA1 (RAM) | 4.62% | 5.27 |
| SP SETIA IMTN 4.670% 20.04.2029 | SP Setia Berhad | AAIS (MARC) | 4.80% | 6.69 |
| S P SETIA IMTN 4.300% 23.06.2028 | SP Setia Berhad | AAIS (MARC) | 4.88% | 5.87 |
Our recommendation
The company’s return to profitability in 1Q2022 after being in the red territory for the past two consecutive years, has set a positive tone on its future earnings. We believe that this momentum could continue towards the remaining months of 2022 in light of Malaysia’s firming economic recovery and high vaccination rate (as of August 11, 2022: 84.1%).
Notwithstanding this, we note on the potential downside arising from any reversal in the economic direction and/or a resurgence of new COVID-19 variant, which might pose challenges on the company’s operating performance. As such, we will closely monitor any developments that could weaken its credit position.
We would like to reiterate that investors should position their portfolios towards a shorter duration bond, on the back of the current rising interest rate and inflationary environment. Based on the said considerations, we think that UEMSMK Jul2025 Corp (MYR) and UEMSMK Jul2027 Corp (MYR) bonds with yield to maturity between the 5.2%-5.5% range are considered attractive at his juncture.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in UEMSMK Jul2025 Corp (MYR) and UEMSMK Jul2027. The analyst who produced this report holds a NIL position in the abovementioned securities.
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