UEM Sunrise back in the spotlight

From change in Aussie buyer to speculation of merger with Eco World

UEM Sunrise Bhd first made the news when it announced that it was axing a deal to sell a part of one of its projects in Melbourne to a hospitality trust there.

While it pursues a new buyer for that property, a bigger development hit the news.

Yesterday, speculation arose that the group was in talks to merge with another local property developer, Eco World Development Group Bhd.

News articles speculated a merger to take place via a share swap agreement.

However, both companies have yet to respond to the news, indicating that the talks, if any, are at a preliminary stage.

While this merger may help expand UEM Sunrise’s local presence, it is left to be seen how valuable the potential merger would be for UEM Sunrise.

There were no details such as the valuations of the share swap.

Analysts note that by itself, UEM Sunrise has been making some inroads into improving its balance sheet.

Says one analyst, “UEM Sunrise has been working hard at lowering its gearing levels, through the sale of assets and clearing of inventory. So does it really need a merger at this point?” he questions.

The analyst adds: “It may not be a strategic move for developers to accumulate too large of a land bank in this current market scenario.”

Another analyst raises a question on the timing of the deal, given current market conditions.

“In this environment, it makes more sense for developers to take on smaller pockets of land that have a fast turnaround period.

“This is as compared with acquiring a sizable land bank that has a five to 10-year gestational period and comes with heavy capital expenditure requirements stemming from township infrastructure development.

“It is critical for developers to look at the quality of the land that they want to take on,” he says.

The analyst reckons that it will have to be a win-win situation for both Eco World and any suitors vying for Eco World’s partnership, for a marriage to happen.

He adds that it would be better for developers to form partnerships on a project piecemeal basis.

Meanwhile, according to sources, the board of UEM Sunrise is still undecided on the potential merger.

The board is expected to meet this month and are likely to discuss alternatives to the merger, such as a potential non-equity partnership with Eco World.

Earlier this week, UEM Sunrise announced the termination of an agreement to sell the serviced apartment component of mixed development Aurora Melbourne Central to Ascendas Hospitality Trust.

UEM Sunrise and Ascendas Hospitality Trust had inked a sale agreement in December 2015 for 252 serviced apartment units in Aurora Melbourne Central for A$120mil in cash.

The termination of the deal was on a mutual basis, on the grounds of disagreements over specifications of certain aspects of the apartments earmarked for sale.

In a Bursa Malaysia filing, UEM Sunrise said the mutual termination would allow the group to seek and explore other opportunities that are more beneficial and in line with its strategic objectives.

The group added that with the success of Aurora Melbourne Central, in terms of sales and settlement, UEM Sunrise has received interest from parties to acquire the property.

UEM Sunrise aims to conclude the sale before year-end.

MIDF Research is neutral on this development, pending the negotiation progress with other interested parties.

Besides that, UEM Sunrise has not recognised any revenue from the disposal to Ascendas.

In a recent report, the research house noted that payment milestones with the new potential buy should happen faster, given that the project has been completed.

“This is supported by the success of the residential component of Aurora Melbourne Central, which has been fully sold and low key interest rates in Australia.

“We think that earnings impact may be minimal if the company can maintain the selling price and complete the deal within its targeted timeline.

“Meanwhile, this event is not expected to affect the remaining portion of the project with the handover of SP5, which is on track in October.

“Settlement rate is also expected to be positive,” says MIDF Research.

UEM Sunrise has been paring down its gearing levels, with net gearing at 0.43 times as of June 30, compared with 0.5 times at end-december 2018.

It posted a revenue of Rm1.42bil for the first half of financial year 2019, bulk of which was contributed by its Australian projects that were completed.

However, on a total sales basis, local projects made up 96% of the total Rm532mil garnered for the first half of FY19.

Going forward, the Australian property market remains a key market for UEM Sunrise.

The group is actively seeking development sites and joint venture opportunities in Australia, especially in the key cities of Melbourne and Sydney.

“We remain committed to our business and expansion plans in Australia.

“We still have substantial holdings in our retail assets in Aurora Melbourne Central and Conservatory, valued at Rm130mil and are continuing to explore strategic growth opportunities,” says UEM Sunrise in an email response.

The group adds that its key focus is the handover of the last stage of apartments at Aurora Melbourne Central and the leasing of its retail assets.

There is no new project launch scheduled for 2019 in Australia.

UEM Sunrise notes that the main challenge it faces in Australia is to anticipate the impact of macroeconomic policies on the products it develops as well as being able to adapt its offerings and operations to opportunities.

The property developer says the change in lending policies, taxation and duties affecting foreign buyers as well as capital outflow controls continue to influence the supply and demand dynamics of the housing and commercial property market in Australia.

“Earlier this month, we decided to divest our site at 412 St Kilda Rd, Melbourne to take advantage of the strong commercial office market, thereby enabling us to use the capital to reinvest in other opportunities in Australia.

“The price expectation for this site is more than A$100mil, compared with the purchase price of A$58mil back in 2016,” says UEM Sunrise.

In this environment, it makes more sense for developers to take on smaller pockets of land that have a fast turnaround period.

An analyst