UOL Group - CIMB Research 2016-05-13: Residential revenue dominates

UOL GROUP LIMITED U14.SI

UOL Group - Residential revenue dominates

1QFY16 net profit slightly below, at 17% of our FY16 forecast.
Thinner operating margins with a higher blend of lower-margin residential development contributions.
Hotel and rental income showed slower but positive yoy growth.
New launches in China and progressive development of ongoing projects to extend earnings visibility.

UOL’s 1QFY16 net profit of S$77m (US$56.3m; +4% yoy) was slightly below expectations, making up 17% of our FY16 forecast.
While revenue rose 39% yoy to S$330.1m (US$241.5m), weaker operating margins due to a higher blend of lower margin residential development business and reduced JV contributions, following the completion of Archipelago, resulted in a smaller 4% improvement in net profit.

About half of 1Q revenue came from residential activities (vs. 32% pcp) and was derived from more volume sales and progressive recognition of ongoing projects.
The group sold an estimated 115 units, mainly from Riverbank @ Fernvale (66.5% sold), Botanique at Bartley (79% sold) and Principal Garden (27.1% sold). These were achieved amidst a slightly more competitive pricing strategy.

Rental revenue rose 4% yoy to S$55.5m amidst a slightly positive rental reversion environment.
To date, the group has locked in about two thirds of its office and c.20% of its retail expiries for this year.
As with other landlords, UOL would look to adopt a tenant retention strategy to keep its buildings occupied.
Hotel operations continued to improve with a 2% hike in revenue to S$105m, thanks to 4% yoy growth in overall Revpar on higher occupancy.

Outlook remains challenging amid a dampened Singapore residential market and subdued office sector.
Underpinning earnings visibility will be the completion of Thomson Three and Seventy St Patrick’s in 2-3Q16.
We expect UOL to continue its competitive pricing strategy to move more residential inventory.
It plans to launch the 398-unit residential component of its mixed development in Shanghai this year and market the 505-unit Clementi Ave 1 site in 2017. This will extend earnings visibility.

We retain our Add call with an unchanged target price of S$8.26, based on a 20% discount to RNAV of S$10.33.
We still like UOL for its diversified business model with strong recurrent income and low gearing of 0.27x.

LOCK Mun Yee CIMB Securities | YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-05-13

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