ab Global Equity Research Australia Real Estate UBS Investment Research 12-month rating Buy Sunland Group Prior: Not Rated 12m price target A$4.95/US$4.25 - Initiation of coverage: Dubai the key to Price A$4.25/US$3.65 growth; Buy RIC: SDG.AX BBG: SDG AU 24 December 2007 Significant growth since listing in 1995 Sunland Group (ASX code SDG) is a low-geared (12% D/TA) A$1.4bn S&P/ASX Trading data (local/US$) 200 developer undertaking residential, commercial and hotel development, project 52-wk range A$4.57-3.10/US$4.24-2.56 management and funds management. The business was founded in Australia in Market cap. A$1.36bn/US$1.17bn 1983 and expanded into Dubai in December 2004. Shares o/s 321m (ORD) Delivery of Dubai business is key Free float 100% We expect Dubai to quickly rise to c51% of EBIT by FY09E with Sunland Avg. daily volume ('000) 750 involved in five Dubai projects (3,014 lots, end value A$3.5bn) and as project Avg. daily value (A$m) 3.2 manager on the A$4bn White Bay project. Delivery and growth of the Dubai Balance sheet data 06/08E operations is premised on adequately managing JV relationships, human resources, economic risks and project completion timing, and (important given strong Shareholders' equity A$0.56bn inflation) budgets. P/BV (UBS) 2.4x Net Cash (debt) (A$0.12bn) What Sunland offers at current prices Sunland is trading at 11.3x FY09E P/E (versus the emerging industrials at 14.5x) Forecast returns and offers a 3.5% FY09E DPS yield (emerging industrials c5.1%), and we estimate Forecast price appreciation +16.5% a five-year EPS CAGR (FY08-13E) of 11.6% pa, underpinned by the Dubai Forecast dividend yield 5.3% business. Forecast stock return +21.8% Market return assumption 11.6% Valuation – Initiating with a Buy rating Forecast excess return +10.2% Our three-stage DCF (calculated discounting diluted EPS) derives a one-year price target of $4.95 (beta 1.19 as observed, with five- to ten-year and terminal EPS EPS (UBS, A$) growth of 3.75% and 2.5%, respectively). This matches our secondary FY09E 06/08E 06/07 SOTP valuation of $4.95 using a weighted EBITDA multiple of 12.9x. We From To Cons. Actual therefore initiate coverage with a Buy rating. H1E - 0.072 - 0.118 H2E - 0.081 - 0.188 06/08E - 0.298 0.289 Highlights (A$m) 06/06 06/07 06/08E 06/09E 06/10E 06/09E - 0.377 0.347 Revenues 489 630 526 481 573 EBIT (UBS) 123 166 131 153 209 Performance (A$) Stock Price (A$) Rel. All Ordinaries Net Income (UBS) 72 88 95 120 169 5.00 200 EPS (UBS, A$) 0.289 0.297 0.298 0.377 0.532 4.00 Net DPS (UBS, A$) 0.120 0.126 0.140 0.177 0.250 150 3.00 100 Profitability & Valuation 5-yr hist av. 06/07 06/08E 06/09E 06/10E 2.00 EBIT margin % - 26.4 24.8 31.7 36.4 50 1.00 ROIC (EBIT) % - 27.6 22.6 20.3 24.9 EV/EBITDA (core) x - 6.5 10.6 9.8 7.6 0.00 0 10/04 01/05 04/05 07/05 10/05 01/06 04/06 07/06 10/06 01/07 04/07 07/07 10/07 PE (UBS) x - 10.5 14.3 11.3 8.0 Stock Price (A$) (LHS) Rel. All Ordinaries (RHS) Net dividend yield % - 4.0 3.3 4.2 5.9 Source: UBS Source: Company accounts, Thomson Financial, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. www.ubs.com/investmentresearch Valuations: based on an average share price that year, (E): based on a share price of A$4.25 on 20 Dec 2007 23:38 EST John Freedman Chad Mikhael Analyst Analyst [email protected] [email protected] +61-2-9324 2453 +61-2-9324 3547 This report has been prepared by UBS Securities Australia Ltd ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 40. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Sunland Group 24 December 2007 Contents page John Freedman Analyst Executive summary 3 [email protected] +61-2-9324 2453 Financial forecasts 9 Chad Mikhael — EPS and DPS profile ..............................................................................................9 Analyst Valuation and recommendation 10 [email protected] +61-2-9324 3547 — Three-stage DCF valuation on earnings of $4.95 ................................................10 — SOTP valuation (EBITDA multiples) $4.95...........................................................11 Group overview 12 — History ..................................................................................................................12 — Divisions ...............................................................................................................12 — Organisational structure .......................................................................................14 — Senior management overview..............................................................................14 — Capital structure ...................................................................................................15 — Capital management ............................................................................................15 — Stock performance ...............................................................................................16 Recent results and growth 17 Australian operations 19 — Multi-storey/Apartments (46% of FY08E EBIT)....................................................19 — Land subdivision (17% of FY08E EBIT) ...............................................................20 — Residential housing (9% of FY08E EBIT) ............................................................22 — Commercial/Industrial development (1% of FY08E EBIT) ...................................24 — Funds management (6% of FY08E EBIT)............................................................25 — Hotel investments and operations (1% of FY08E EBIT) ......................................26 International operations 28 — Overview...............................................................................................................28 — Development operations.......................................................................................28 — Project management ............................................................................................29 — Funds management..............................................................................................29 UAE and Dubai overview 31 — Region overview (UAE) ........................................................................................31 — Dubai ....................................................................................................................34 Summary 38 UBS 2 Sunland Group 24 December 2007 Executive summary Overview: Sunland Group (ASX code SDG; market cap. A$1.37bn, free float c70%) is an integrated developer in the S&P/ASX 200. It has operations across property development (both multi-storey and residential), residential land subdivision, project management, hotel development and ownership as well as funds management. Sunland was founded in Queensland, Australia in 1983 and has operations across eastern Australia (Queensland, Victoria and New South Wales) and in Dubai (residential and hotel development since December 2004). Sunland’s current share price is up 17.3% YTD to $4.25, driven by its continued expansion into Dubai. Its track record for growth and returns is strong with a DPS five-year CAGR (FY03-07) of 35% pa. Chart 1: FY08E EBIT split by division Chart 2: FY07 EBIT/revenue margins split by division Funds Mgmt International 70% 65% Comm & Ind 60% FY07a FY08e 6% Dev (incl proj Ops. 60% services) 1% 50% 21% 40% 37% Hotel 30% 26% 25% 25% 1% Urban Land 30% 22% Dev . 20% 12% 8% 8% 17% 10% 7% Multi-Storey 0% 46% Resid. Housing Mgmt Funds group Land Housing 9% Op's. Total SDG Total Subdivision Hotel Inv. & Multi-Storey Source: UBS estimates Source: Sunland, UBS estimates Gearing remains low: Sunland has gross assets of $780m, with very low gearing (debt to assets of 12.6%; or net debt/assets of nil). Sunland’s NTA as at June 2007 is $2.49, excluding deferred tax assets and liabilities. Sunland is currently trading at a large premium to NTA, given the value of its pipeline and value attributed to its corporate businesses. Dubai – the key to future growth: Sunland first expanded its development Dubai pipeline – 3,014 multi-storey/ operations into Dubai in December 2004. Presently, it has 3,014 multi- apartment lots spread across five storey/apartment lots spread across five projects. Further, it is project managing projects the White Bay community masterplan project. The founder of Sunland Group, Mr Soheil Abedian, is now based in Dubai to oversee operations in his role as Managing Director of Sunland Group International. In FY07, EBIT earned from Dubai operations was just 4%. Based on our estimates, we expect this to grow to 21% by FY08E and 51% by FY09E. Effective delivery and future growth of Sunland’s Dubai operations is premised on several factors: (1) Joint venture relationships – Sunland has already established a joint venture with Emirates Investment Group (EIG) to construct resorts, and residential and commercial projects in the Gulf region. EIG is associated with Sheik Tariq bin Faisal Al Qassimi – a member of the ruling family of UBS 3 Sunland Group 24 December 2007 Sharjah (one of the seven emirates in the UAE) and also Chairman of the Economic Development Board in Sharjah. EIG is presently a 50% JV partner in the A$854m Palazzo Versace, Dubai and A$577m D1 projects. Becfar (an investment