UOL Group - Steady Ship
Initiate with BUY; TP SGD7.39
- We initiate coverage of UOL with a BUY and SGD7.39 TP, implying a 24% discount to its RNAV of SGD9.70.
- We expect UOL to outperform its developer peers as we believe a risk-averse market will favour those with conservative trading portfolios and strong recurring income. UOL screens well among our covered developers for ROEs and valuations.
- We also see downside support from its stub value, which is currently at a 42% discount to its underlying assets.
- Recommend a switch from CityDev (HOLD, TP SGD8.90) for Singapore Property exposure.
Anchored by large recurring income
- With risk appetite remaining low, we expect the market to favour developers with large recurring income over those highly dependent on trading income.
- UOL generates over SGD300m of recurring cashflow a year. This should cushion it against more-cyclical development earnings.
Good execution; Conservative residential portfolio
- Even though the group was one of the largest buyers of land in the enbloc market in the years leading up to GFC, it managed to de-risk its portfolio by selling all redeveloped homes. Therefore, unlike several of its peers that are struggling to offload their unsold stock to avoid hefty Qualifying Certificate (QC) penalties, it is not at risk.
- Good execution has also resulted in high pre-sales for projects currently under development. Hence, we believe it has one of the most conservative residential portfolios among listed developers.
- While two high-end projects by 44% associate UIC (UIC SP, Not Rated) could be subjected to Additional Buyer’s Stamp Duty (ABSD) payments in 2017, we believe their land costs are not excessive, even after factoring in this one-off charge. And with a launch pipeline as far out as 2018, it is under less pressure to replenish land at high prices.
Value-unlocking potential remains
- Restructuring potential of its cross-holdings in related entities remains.
- Streamlining its complicated cross-holdings could potentially create synergies and offer clearer look-through valuations. But as its timing remains uncertain, we have conservatively adopted the market value of UIC in our RNAV and excluded upside from any restructuring.
- Downside risks: Overpaying for land and a sharp increase in interest rates.
- Our TP of SGD7.39 implies a 24% discount to its SGD9.70 RNAV.
- Our assumptions are:
- office/retail cap rates of 3.75-4.00%/5.25-5.50%;
- Maybank KE’s TP for UOB;
- the latest market values of its hotels, which imply a blended cap rate of 5.1%;
- the market value of UIC at SGD2.75 a share;
- discounts of 20% for its Singapore residential and commercial assets considering downside risks to asset prices over a year;
- a larger 25% discount for its global hotel assets to reflect the illiquid nature of this asset class; and
- a larger 25% discount for its overseas properties to account for execution risks. The discount rates we applied are consistent across the sector.
- We believe our TP is conservative, as it translates into 0.69x 2017E P/BV, below its 10-year average of 0.76x. The 25% discount we applied to its hotel assets is also much larger than the 3% discount implied in its privatisation offer for Pan Pacific Hotel Group (PPHG) in 2013. It is also conservative compared to the 12% asset discount implied by the market price of CDLHT (Not Rated), a hospitality bellwether REIT. We think this sufficiently factors account for the illiquid nature of hotel assets.
- Finally, by adopting the market price of UIC, we have not built in restructuring upside. UIC trades at just 0.6x P/BV, a 45% discount to our RNAV estimate of SGD5.00 for the stock.
- Monetisation of property assets.
- Rebound in home sales.
- Unwinding or restructuring of cross-holdings in related parties like UOB, UIC and Haw Par.
- Overpaying for land.
- Poor execution of development projects.
- Sharp increase in interest rates which could dampen demand for properties and drive down asset prices.