UOL Group - DBS Research 2017-06-27: Gaining Weight Effortlessly

UOL Group - DBS Vickers 2017-06-27: Gaining Weight Effortlessly UOL GROUP LIMITED U14.SI

UOL Group - Gaining Weight Effortlessly

  • UOL is acquiring 4.2% UIC shares held by Haw Par via share swap.
  • Deal does not trigger mandatory general offer; seeking whitewash waiver on UOL.
  • UOL to consolidate UIC and see a S$333m gain. 
  • Positive on UOL with increased access to Singapore property via increased stakes in UIC.

What’s New

UOL to raise its stake in UIC to 48.9% via share swap; however no trigger of mandatory general offer. 

  • UOL has proposed the acquisition of 60m (4.23%) UIC shares held by Haw Par via a share swap option agreement on an exchange ratio of 2.2 (implying a 6% discount on UOL’s shares based on UIC’s current price), contrary to the full privatization of UIC that the market had previously expected. This raises UOL’s stake in UIC from 44.71% to 48.94%, just below the threshold for a mandatory general offer which UOL does not intend to trigger. 
  • The exercise of the options is subject to approvals from shareholders of Haw Par, UOL (whitewash waiver explained below) and SGX, with the expected conclusion by 31 October 2017.

Issuance of 27m new UOL shares in exchange for UIC shares; seeking whitewash waiver. 

  • UOL will issue 27m new shares (3.36% of UOL’s existing number of shares) in exchange for UIC shares. 
  • In addition, UOL will also seek a whitewash waiver on a mandatory general offer on UOL shares as the share swap will raise the Wee family's holdings in UOL from 41.49% to 43.39%.

Increased access to UIC’s commercial property portfolio. 

  • The reason given for the proposed acquisition was to “increase the UOL Group’s access to UIC’s commercial property portfolio and, in particular, UIC’s office properties in the Singapore Central Business District”. 
  • UIC has a portfolio of 2.5m sqft of office space and 1m sqft of retail space in Singapore with key assets in CBD including SGX Centre 2, Clifford Centre, Marina Square (and three hotels), UIC Building.

UOL to consolidate UIC’s financials and will recognise a net gain of S$333m. 

  • Post the share swap, UOL will be able to consolidate UIC’s financials as the largest shareholder in UIC (deemed to be able to exercise de facto control over the UIC Group). 
  • Based on the proforma financial effects, UOL will recognize a net gain of S$333m, thus doubling its FY16 proforma EPS.

Positive although not a full privatisation. 

  • This comes as a little anti-climax to the anticipation of a full privatisation, but we believe this is a positive step for UOL to gain more control on UIC and hence exposure to Singapore properties at very little cost/cash outflow to UOL and related entities to the major shareholder, albeit small. 
  • Potential value may arise if UOL is able to unlock a larger portfolio of investment properties held by both UOL and UIC.

Maintain BUY; TP of S$8.73. 

  • We maintain our BUY rating on UOL as it is trading at an attractive valuation of 0.8x FY16A P/NAV, which is at the lower end of its historical range and still lags the other large-cap developers which are trading close to 1x P/NAV.
  • We see UOL as a prime beneficiary of the improving sentiment on Singapore property, being one of the first to turn positive following its aggressive land banking last year.

Rachel TAN DBS Vickers | Derek TAN DBS Vickers | 2017-06-27
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 8.730 Same 8.730