UOL Group Limited - Phillip Securities 2017-01-16: The Slow and Steady Wins the Race

UOL Group Limited - Phillip Securities 2017-01-16: The Slow and Steady Wins the Race UOL GROUP LIMITED U14.SI

UOL Group Limited - The Slow and Steady Wins the Race

  • Two new Singapore developments projects slated to be launched for sale in 2017 and 2018.
  • Acquired two mixed-use buildings in London in 2016; Expect cap rate compressions amid low supply and vacancy rates of offices in Central London.

Company Background 

  • UOL Group Limited (UOL) has four primary business segments, namely property development, hotel operations, property investments and investment in securities.
  • Under UOL’s hotel subsidiary, Pan Pacific Hotels Group, the company owns the two brands, Pan Pacific and PARKROYAL
  • UOL has a 44.3% stake in listed property developer, United Industrial Corporation (UIC).

Investment Merits

Nimble and well-executed development strategy; Only two launched projects remaining with more than 10% unsold units in Singapore portfolio 

  • We favour UOL Group Limited (UOL) for its nimble and well-executed strategy especially in the current market environment where demand is curbed by a series of property cooling measures in Singapore. 
  • The result of the Group’s strategy mitigates its risk of facing potential charges or fines from clawback of additional buyers’ stamp duty (ABSD) should there be an overhang of unsold properties in a development.

Ample time to sell remaining units in Principal Garden coupled with strong development margins 

  • The take up rate of Principal Garden has been encouraging as compared to two adjacent projects, The Crest and Mon Jervois
  • UOL still has plenty of time to clear the remaining units as the deadline for ABSD clawback is in April 2019. We project a development margin of 21% for Principal Gardens which is healthy compared to the other two developments.

Rental income from a diverse base of Singapore investment properties occupies lion share of profits; and expected to continue supporting operating performance 

  • Rental income from investment properties made up of at least 50% of the Group’s total operating profits in the past three years between FY13 and FY15. 
  • UOL owns a mixture of investment properties ranging from serviced suite, office and retail properties where majority of these assets are in Singapore.

Strong occupancy rates for portfolio of office properties as majority of these assets are located in the fringe area which enjoy lower vacancy rates 

  • UOL owns five office properties, yielding 100,000 square metres of net lettable area where they are mostly located in the fringe of the CBD area. 
  • As at 3Q16, the Group’s portfolio of Singapore office properties is standing at a healthy occupancy rate of 94% which is higher than the average occupancy rate of fringe offices (92%).

Continued depreciation of the SGD could continue to boost arrival numbers of Chinese and Indonesian visitors and benefit UOL’s Australia hotel operations 

  • The boost in international tourist arrivals was led by a 36.1% and 5.9% growth in visitors from China and Indonesia respectively. We believe the depreciation in the SGD against the RMB and IDR was one of the main factors that led to an increase in tourist arrivals from these two countries. 
  • We view that a continued depreciation in SGD, translating into lower price points for goods and services in relative terms, will benefit domestic hoteliers.

Initiating coverage with “ACCUMULATE” rating and target price of S$7.05 

  • We favour UOL for its consistency in operating performance since at least 68% of its operating profits are contributed from recurring income. 
  • As the local property development market extends a decline, the Group is well-buffered by its stability in earnings. 
  • On the property development front, UOL is nimble and sits on a relatively comfortable position as most projects are either close to being completely sold, or sitting on strong development margins according to our projections.

Peter Ng Phillip Securities | 2017-01-16
Phillip Securities SGX Stock Analyst Report ACCUMULATE Initiate ACCUMULATE 7.05 Same 7.05