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

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.
  • Pan Asia hotel footprint lends diversification and stability to revenue base.
  • Maintain Add with a lower target price of S$7.96.

Underlying operations robust, excluding reval deficit

  • 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 projects seeing good take-up rates

  • 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.

Still enjoying modest positive rental reversions

  • 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.

Mixed performance within its portfolio

  • 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.

Retain Add call

  • 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
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 7.96 Down 8.06