UOL Group - CIMB Research 2017-03-30: Strong Singapore core

UOL Group - CIMB Research 2017-03-30: Strong Singapore core UOL GROUP LIMITED U14.SI

UOL Group - Strong Singapore core

  • Good take-up at the Clement Canopy and robust residential sell-through rate translates into S$1.05bn of locked in presales as at Mar 17.
  • Stable rental and hotel income to underpin recurrent income base.
  • Low gearing of 24% and capital redeployment into completed assets minimise development risks.
  • UOL remains our top pick amongst Singapore developers, TP intact at S$7.96.

Reiterating Add call 

  • We reiterate our Add rating on UOL post update visit with management. 
  • Residential sales are still well received, in tandem with the improved market sentiment. 
  • Meanwhile recurrent income from rental, hotel operations and dividend income, accounting for 86% of FY16 PBIT, will continue to provide a stable income base. 
  • The stock is currently trading at 30% discount to RNAV of S$9.95 with potential 14% upside to our target price of S$7.96, pegged at a 20% discount to RNAV.

Brisk residential sales, c.S$1.05bn of presales yet to be billed 

  • Since launching in early Mar, the Clement Canopy has enjoyed good take-up with c.52% of the project sold to date. 
  • Other ongoing projects are also benefiting from improved market sentiment with increased sales rate. It has good earnings visibility with an estimated S$1.05bn of attributable locked in sales to be recognised over the next 2-3 years. 
  • Apart from three remaining projects with an effective share of 700 units, UOL will continue to tap the government land sale and enbloc markets to restock inventory.

86% of PBIT from recurrent income sources 

  • UOL has one of the highest recurrent income bases amongst peers, accounting for c.86% of total PBIT (incl. 44.6% share of UIC’s contributions), backed by an attributable 3.4msf of commercial/retail space in Singapore and more than 10,000 owned and managed hotel rooms. 
  • Despite short term challenges in the office and retail sectors, it has fairly high portfolio occupancy due to the niche locations of its properties, within the Newton/Novena area. In the longer run, it may potentially monetise mature office assets.

Low gearing and capital redeployment to expand recurrent income 

  • UOL’s strategy is to redeploy capital into completed assets such as the recently purchased Hilton Melbourne South Wharf, rather than greenfield projects, to build on its recurrent income base and minimise development risks. 
  • To be rebranded into a Pan Pacific property, the purchase will deepen the group’s earnings base and brand awareness in Australia. 
  • Group gearing of 0.24x as at 4QFY16 provides significant headroom for medium term expansion possibilities.

Raises stake in associate United Industrial Corporation (UIC) 

  • UOL bought 217,000 UIC shares in early Mar this year, nudging the overall UOL/Wee family deemed stake to 49.6612%. We think crossing the 50% shareholding in UIC is key. 
  • In addition, moving closer to any potential corporate action to unlock value in the medium term could result in a clearer look-through valuation of its underlying assets and narrow its gap to RNAV.

Any volatility in earnings is a stock entry opportunity 

  • We continue to like UOL for its diversified business model and strong recurrent cashflow. 
  • Key catalyst for share price performance would be continued good sell-through rate for its residential projects. 
  • Key risk to earnings is the potential small knock-on impact from UIC’s additional buyer's stamp duty (ABSD) penalties, but we see any resulting share price weakness as an opportunity to Add position in the stock.

LOCK Mun Yee CIMB Research | Yeo Zhi Bin CIMB Research | 2017-03-30
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 7.960 Same 7.960