UEM Sunrise Bhd’s construction activities are expected to be disrupted, affecting its progressive billings due to the longer-than expected Phase 1 of the National Recovery Plan (NRP) and transition to Phase 2.

Hong Leong Investment Bank Bhd (HLIB Research) remains cautious on the challenging market environment in Johor, one of the key markets for UEM Sunrise and where 77% of its 4,330ha of landbank are in the southern region.

HLIB Research analyst Nazira Abdullah expects the property market in Johor to remain soft due to depressed valuation and no catalytic developments.

“The management believes there are opportunities within the domestic market at a very specific price point.

“On a brighter note, the management has been increasing its landbank in the central region to reduce its exposure to Johor,” Nazira wrote in a research note on Monday.

Nonetheless, she noted the protracted lockdown and high Covid19 cases might affect UEM Sunrise’s progressive billings and pose sales challenges ahead due to weak buyer sentiment.

HLIB Research cuts its financial year 2021 (FY21) earnings forecast on UEM Sunrise by 11.5% to account for lower progressive billings from the loss of productivity but maintained FY22-23 earnings.

The investment bank maintained a ‘Hold’ rating with a lower target price of 40 sen from 49 sen as earnings forecast was recalibrated and pegged a larger discount of 80% (from 75%) to its estimated revalued net asset value of RM1.94.

UEM Sunrise shares closed unchanged at 36 sen on Monday, valuing the company RM1.77 billion.

Nazira sees downside risks that could cause the management to revise downward its gross development value (GDV) launch target of RM1.2 billion with a sales target of RM1.2 billion if Covid-19 cases remain high and lockdown is prolonged.

Nazira wrote that the group’s sales in April and May have remained encouraging, with the highest sum achieved year-to-date in May.

Nonetheless, June and July sales have declined due to Phase 1 restrictions.

In addition, Nazirah noted digital sales have increased to 43.4% in FY21 from 26.8% in FY20 as management expedited its digital marketing initiatives, sales campaigns and collaboration, which has also reduced their advertising and marketing expenses.

For its international projects, a total of AU$43 million (RM133.24 million), comprising AU$14 million from Aurora Melbourne Central and AU$29 million from Conservatory Melbourne, is pending settlement with 43 remaining units yet to be handed over to settle fully by 2021-end.

UEM Sunrise has four projects launched to date with a total GDV of RM300 million, in which 94% of the units are in the RM500,000 to RM800,000 price segment.

The projects are KAIA Height Tower A in Seri Kembangan, Selangor, with GDV of RM171 million and take-up rate of 30%; Verna Park Terrace in Bangi, Selangor, (RM57 million GDV, 57% take-up rate); Verna Garden Cluster in Bangi (RM44 million GDV, 65% take-up rate); and Verna Twin Villa in Bangi (RM171 million GDV, 75% take-up rate).

“Future launches for the rest of the year will include a recently acquired pocket of land in Taman Pertama, another phase of KAIA Height and Senadi Hills,” Nazira wrote.

At present, UEM Sunrise has 40 sites with 70% allowed capacity to operate during the Full Movement Control Order.

“Management is confident once Phase 2 of the NRP is in place, they can catch up with the construction activity.

“Although management assured there will be no delay in completion of projects, we believe progressive billings will still be affected from Phase 1 restrictions and the transition to Phase 2 is longer than expected,” she said.

She said booking-to-sales conversion takes about four to six weeks to process due to the Phase 1 lockdown.

The analyst noted UEM Sunrise’s current conversion rate is at 60% and there will be no major impairment this year as the bulk of it is already being recognised in FY20.

She expects the company’s management, which has been acquiring pocket land in Klang Valley for the past few years owing to its quick turnaround, will continue this strategy and secure new land banks for more attainable products.

The company’s current township development called Kiara Bay in Kepong, Kuala Lumpur, has a GDV of RM17 billion in 29.13ha of land.

“Its first high-rise residential development in this township, Residensi AVA, which has 870 units launched in November 2019 with GDV of RM652 million, has a secured sales to-date of 66% and booking at 11%.

“The structure of its retail component (the Beat) for this township was completed in mid-March 2021,” Nazira said.

The fit-out works are in progress and will be completed in the third quarter of 2021 (3Q21).

The management expects to open the Beat in 1Q22, while the township infrastructure component, a 3km internal road from Kiara Bay to Jalan Kepong, was opened to the public in April 2021.