The southern appeal

The southern appeal

INVESTORS who held on to their shares in UEM World Bhd for years in the fervent belief that the tide would eventually turn for the group have been vindicated.

In fact, it would hardly be considered a stretch to say that the stock has taken on a life of its own over the last few weeks. Assuming an investor had bought the shares at the start of the year, he would have made a tidy gain of more than 130%.

UEM is said to be well-positioned to benefit from the anticipated appreciation in Johor land values
This, in part, could be based on the fact that several research houses have come out with reports to highlight the company's encouraging prospects given the government's push to develop the Iskandar Development Region (IDR) into a major economic powerhouse. (UEM World owns about 10,000 acres of land in Bandar Nusajaya, which is an integral component of the IDR.)

UOB-Kay Hian Research reckons the IDR has all the makings of the next super-cycle performer on Bursa Malaysia.

“(The IDR) is a strong super-cycle performer candidate because it is a new investment theme, the government is involved, policy changes are likely to take place and mega infrastructure contracts that have been budgeted under the Ninth Malaysia Plan (9MP) are likely to be awarded,” it says.

Recent land deals in the state have also served to highlight the potential value of the vast tract of land owned by UEM World in Nusajaya, Johor.

The sale of commercial land in Nusajaya by SP Setia Bhd was transacted at RM65 per sq ft. UEM Land, a wholly owned unit of UEM World, managed to sell five parcels of industrial land to Singapore's HG Metal Manufacturing Ltd at RM21psf.

This has given rise to hope that UEM World's land in the vicinity could be worth a lot more than what industry observers initially reckoned it would fetch.

Some observers now say they would not be surprised if more foreign investors make a beeline for land in Johor. They say the stark price differential between Malaysia and Singapore for residential, commercial and industrial land would make foreigners willing to fork out anywhere between RM20 and RM30 psf for land in Johor.



Re-rating catalysts

UOB-Kay Hian says it is likely that companies owning land in the state, like UEM World, Tebrau Teguh Bhd and Mulpha International Bhd, would see their revised net asset values (RNAV) rise over the next few years as land values appreciate more on the back of policy changes.

“For UEM World, if land prices increase to RM20 psf (or equal to Klang-Shah Alam levels), its RNAV could rise to RM8.35,” UOB-Kay Hian points out.

A foreign investment research house has come up with a RNAV-based target price of RM5 for UEM World shares. Based on last Thursday's closing price of RM4.08, this means the shares could still enjoy an upside of more than 20%.

The valuation is based on RNAV as the bulk of UEM World's worth is derived from its undeveloped land bank. In Johor, the group has about 10,000 acres of undeveloped land, making UEM World one of the largest owners of land in the IDR.

The foreign research house notes in a report dated Feb 6 that UEM World is well positioned to benefit from the anticipated appreciation in Johor land values. It reckons that every RM1 psf rise in land value would boost the investment bank's RNAV for UEM World by 5%.

“The Government’s focus on developing southern Johor and possible capital management initiatives at group level are conducive factors to drive the potential re-rating of UEM World. We believe the catalysts will come from appreciating land values in Johor and potential capital management initiatives as UEM World may look to dispose of some of its non-core assets,” it says.

It is unlikely that UEM World would distribute cash given that it requires capital for the development of Nusajaya. However, the foreign house says it is possible that the company would make a distribution in specie of its holdings in some of its non-core assets like Cement Industries of Malaysia Bhd and Pharmaniaga Bhd.

This level of optimism among analysts about UEM World is fairly new. This time last year, the group still had its work cut out to convince analysts that it is truly positioned for growth.

Many had come away from a media/analyst briefing not altogether convinced that Nusajaya would take off in as big a way as had been suggested by UEM World chief Datuk Ahmad Pardas Senin.

Since then, however, the development of the Southern Corridor has received the government's endorsement.

It is now one of the major plans that would determine the overall success of the 9MP.

UEM World's investment case has also been enhanced by measures taken to address its debt burden. Last October, the group unveiled a plan to raise RM1.94bil via a de-gearing exercise. This involves the sale of land to Khazanah Nasional Bhd.

The plan would simultaneously help UEM World raise financing to accelerate the development of Nusajaya and get Khazanah actively involved in the development of key projects in the vicinity of the group’s existing land bank.