UOL Group - CIMB Research 2016-06-30: Concerns overdone

UOL Group - CIMB Research 2016-06-30: Concerns overdone UOL GROUP LIMITED U14.SI 

UOL Group - Concerns overdone

  • Exposure to UK low at 3.5% of total assets and even less on earnings
  • Residential projects seeing higher take up, c.S$750m of attributable locked in sales
  • Large rental income base underpinned by high occupancies and slight positive rental reversion
  • UIC’s residential projects a potential dampener, but only slight
  • Maintain Add rating, with a revised target price of S$8.06 (20% discount to RNAV)

Only 3.5% of total assets exposed to UK, less on earnings

  • Concerns over UOL’s UK exposure have been overstated. Currently, it has only £200m exposure to the country via a completed office property and a mixed hotel/residential project. Combined, the two make up only 3.5% of its total asset base. We reckon when the latter is fully completed, this exposure would rise to a still-small c.8% of total assets. 
  • As for earnings, rental income derived from its 10,900sm office building makes up < 1% of group topline.

Estimated S$750m of presales yet to be recognised

  • UOL’s Singapore residential projects have enjoyed continued buying interest over the past six months and sales are largely locked-in at Botanique at Bartley (95% sold) and Riverbank @ Fernvale (75% sold). Its latest launch, Principal Garden, is 35% taken up. 
  • In total, the group has secured attributable presales of S$750m, the bulk of which will be recognised in FY17/18. 
  • Income visibility will likely be further bolstered by new upcoming launches such as Clementi Ave 1, Park Eleven, Shanghai and Bishopsgate, UK.

Steady base from rental income

  • High occupancies of 89-100% continue to underpin UOL’s rental income base. Some 35% of its office and 22% of retail leases are due to be re-contracted this year, and we expect small but positive rental reversions from them. This recurrent income base is further bolstered by the group’s hotel operations, which enjoyed 4% Revpar growth in 1Q16. 
  • While we expect the hotel industry to remain anaemic this year, due to large influx of new rooms, we think UOL’s hotel portfolio should deliver a steady performance.

Exposure to UIC's residential exposure a dampener, but slight

  • Come 2017, we believe the three residential projects of 44.3%-owned UIC could be impacted by the Additional Buyer's Stamp Duty (ABSD) if they are not fully sold by then. 
  • The projects, Alex Residences, Pollen & Blue, and Mon Jervois, are currently 12-61% sold. We estimate c.S$57m in penalties could hit UIC’s bottomline due to these three projects, translating to an attributable S$21m knock-on impact on UOL’s earnings and RNAV. This could shave off 2.6 Scts or 0.25% of UOL's RNAV, based on our estimates.

Maintain Add

  • We cut our FY16-18 earnings by 2.3-8.5% to factor in weaker £ translation impact and updated residential sales trend. 
  • We also cut our RNAV estimates by 4.4% to S$10.08 to reflect the potential impact of UIC’s penalty payments. This reduces our target price (from S$8.26 to S$8.06), pegged to 20% discount to RNAV. 
  • Given that the marginal impact from Brexit and potential ABSD payment, UOL's recent underperformance is unjustifiable, in our view. 
  • Potential re-rating catalysts are robust residential take up and cheap valuations.

LOCK Mun Yee CIMB Securities | YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-06-30
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 8.06 Down 8.26