- We downgrade UEM Sunrise (UEMS) from BUY to HOLD, with a lower fair value of RM1.29/share. In line with our more cautious outlook, we have also widened the discount attached to its NAV/share (i.e. from 40% to 45%).

- Firstly, our revised outlook reflects the continued weakness in the Johor property market amid policy uncertainties – the most recent being Johor government’s decision to freeze approvals of new serviced apartment projects in the state. Of all the property stocks, UEMS has the highest exposure in Johor; c.77% of its landbank are in this region.

- We believe management’s move to diversify its landbank beyond Nusajaya – with an immediate focus on landed homes in Puteri Harbour and Gerbang Nusajaya – is a step in the right direction.

- We also feel the same for its successful maiden launch of Nusajaya Tech Park (JV with Ascendas). However, the near-term impact from both moves may not be immediately visible.

- Secondly, there is less clarity on UEMS’ earnings outlook in the near term amid a more challenging property market. Embedded in its base profit target of RM500mil are some potential strategic land sales from SILC (Phase 3) and Puteri Harbour.

- Indeed, 1Q15’s net profit of RM53mil only makes up ~10% of the base target. Any delays in strategic land sales could cause a shortfall in its profit target, we reckon, although earnings could pick-up in 2H once construction works for its Aurora Melbourne Central project begins in June. To be conservative, our revised earnings is ~7% lower.

- Earnings fell 14% YoY partly due to commission paid for this project, which will likely impact 2Q as well. The top three major revenue contributors were Teega (RM109mil), Summer Suites (RM51mil) and Arcoris (RM39mil).

- Thirdly, new property development sales could be flattish this year with a base target of RM2bil (FY14: RM2.4bil). 1Q15 sales was RM390mil, of which a bulk came from Aurora Melbourne (RM251mil).

- Likewise, pre-sales momentum – bar Australia – remains muted with no launches done during the quarter under review. The launch of Conservatory (GDV: RM608mil), UEMS’ second Australian project, could happen by end- 3Q/4Q15.

- From a portfolio perspective, sentiments on the stock could be further dented by its recent removal from the MSCI Malaysia index, in the absence of a stronger turnaround in pre-sales or fresh catalyctic projects.

Source: AmeSecurities Research - 22 May 2015