UOL Group - CIMB Research 2016-08-04: Buffeted by non-cash and one-time items

UOL GROUP LIMITED U14.SI

UOL Group - Buffeted by non-cash and one-time items

2Q results below on revaluation deficit for investment properties and a one-time business acquisition cost.
However, underlying operations are still robust with residential projects progressively taken up, and new project launch in 1Q17.
Rental revenue was relatively flat, tenant retention is key.

UOL’s 2Q earnings of S$68.8m were below expectations, accounting for 18% of our FY16 forecast, whilst revenue of S$363.5m, +6% yoy, came in line with our projections. The main variance in these results was a net revaluation haircut of S$19.6m taken largely for its investment properties as it capitalised the value of its assets based on the current softer market rents.
There was also a net S$7.1m business acquisition cost recognised from its recent High Holborn office purchase.

Residential revenue was 14% higher yoy with progressive billings and higher sales rate from ongoing projects such as Botanique at Bartley and Riverbank at Fernvale, and maiden contribution from Principal Garden (currently 42% sold). Seventy St Patrick’s is scheduled to be completed in 3Q16 and Riverbank @ Fernvale in 1Q17.
To extend further earnings visibility, UOL is planning to launch its Park Eleven project in Changning in 3Q and the 505-unit Clementi Ave 1 project in 1Q17.

While UOL took revaluation deficits based on declining market rents and overall rental revenue remained flat yoy, it is still enjoying flat to high single-digit positive rental reversions at its retail and office properties.
To date, it has re-contracted c.80+% of leases expiring in FY16 while maintaining high occupancy of 90% and above within its portfolio.
Going forward, it will maintain a tenant retention strategy amid the high incoming supply of office space. Hence, we expect rental income to remain fairly flat.

Hotel revenue was up 3% yoy on the whole, although underlying performance varied, with a weaker Singapore Revpar (-1% to -2%), in line with the weaker trend amongst its Singapore peers. This was offset by stronger operations in Australia.
The group has completed an extension of rooms at ParkRoyal Parramata in Sydney to 286 rooms in Aug 16 and signed a management contract for a new hotel in Beijing.

We have adjusted our FY16 EPS estimate to factor in the revaluation loss and 1.2% expansion in share base due to new shares issued under its scrip dividend scheme. Consequently, our RNAV and TP are lowered to S$9.95 and S$7.96.
We expect UOL’s operating performance to remain robust, and continue to like it for its diversified business model.
Downside risk may come from more revaluation cuts from a declining office rental market.

LOCK Mun Yee CIMB Securities | YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-08-04

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