UOL Group Ltd (UOL SP) - Maybank Kim Eng 2017-06-23: A Paper Exercise

UOL Group Ltd (UOL SP) - Maybank Kim Eng 2017-06-23: A Paper Exercise UOL GROUP LIMITED U14.SI

UOL Group Ltd (UOL SP) - A Paper Exercise


Maintain BUY and SGD9.05 TP 

  • UOL will be increasing its stake in UIC to 48.94% from 44.71% via a share swap with Haw Par. We see this deal among the related parties of Dr Wee Cho Yaw as a paper exercise with minimal impact on UOL. 
  • Nonetheless, eventual control of more than 50% of UIC could unlock hidden value within the group and could be a catalyst to watch. 
  • We keep our estimates pending deal completion. Maintain BUY and SGD9.05 TP, at a 15% discount to our RNAV of SGD10.66. UOL remains our top sector pick with catalysts expected from property price rebound. 
  • Risks to our view include overpaying for land and sharp fall in property prices.


Share swap to increase control of UIC 

  • UOL announced that it will be issuing 27.3m new UOL shares in exchange for 60m shares in UIC held by Haw Par. This will raise its stake in UIC to 48.94% from 44.71%. The swap ratio of 2.20 UIC shares to one UOL share is based on a multiple (rounded down) between their share prices and latest NAVs. 
  • A Whitewash Waiver (with conditions) has been granted and UOL is not required to make a mandatory general offer for UIC.




Finer details 

  • Pro-forma disclosures suggest that the deal will increase UOL’s 2016 NTA to SGD10.33 (+2.6%). This is due to a net gain of SGD332.7m from a change in the recognition of UIC from associated company to subsidiary. This arises from a change in control from an accounting perspective.
  • Furthermore, accounting standards require the underlying assets of UIC to be consolidated at fair market values after this transaction. Hence, hotel assets previously held at depreciated costs on UIC’s books (such as its Marina Centre hotels) will have to be consolidated at market values.


Next step: statutory control to unlock value 

  • As highlighted in our initiation report last year, UIC has a large pool of prime commercial properties with redevelopment and repositioning potential. Hence, we believe gaining statutory control of more than 50% of UIC would allow UOL to unlock the potential of these assets. 
  • We see this as a less-risky and cheaper way to create shareholders’ value in times of elevated land prices.


Swing Factors


Upside

  • Monetisation of property assets.
  • Rebound in home sales.
  • Unwinding or restructuring of cross-holdings in related parties like UOB, UIC and Haw Par.

Downside

  • Overpaying for land.
  • Poor execution of development projects.
  • Sharp increase in interest rates which could dampen demand for properties and drive down asset prices.




Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-06-23
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 9.050 Same 9.050



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