UOL Group - DBS Research 2018-03-06: Firing On All Fronts!

UOL GROUP LIMITED U14.SI

UOL Group - Firing On All Fronts!

Higher dividends in FY17 a surprise.
Three residential sites to be launched in 2018-2019; strong market sales volumes imply strong take-up rates.
Hotels in Singapore, Australia expected to see stronger operational performance.
Target Price lifted to S$10.23; earnings revision on consolidation of UIC numbers.

We maintain our BUY rating on UOL Group (UOL), now trading at an attractive valuation of c.0.8x P/NAV with the consolidation of UIC. The successful launches of recently purchased land sites in the en-bloc market will be re-rating catalysts for the stock.
We have lifted our Target Price to S$10.23 as we review our portfolio cap rate assumptions. Our earnings forecasts are lifted by 14-19% as we consolidate UIC numbers in our estimates.

More positive than consensus as UOL stands to benefit from improved sentiment in the Singapore property and hospitality segments. As the earliest to land bank at a lower price and three sites to be launched in the coming quarters, UOL stands to benefit from the improved sentiment in the Singapore property segment.
In addition, the turnaround in the hospitality segment bodes well for UOL’s hotel properties, and now with UIC’s hotel properties.

More land banking, strong sales take-up, potentially gaining more control on UIC to unlock value.
3Q17 results boosted by gain from acquisition/consolidation of UIC. FY17 net profit of S$891m included gain on acquisition and consolidation of S$542m.
Key positives:
1. property launches in FY18-FY19 with potential gross development value (GDV) of S$1.4bn or more, and
2. higher dividends of 17.5 Scts (15 Scts in FY16).

Maintain BUY on attractive valuations. We raised our Target Price to S$10.23, pegged to a 15% discount to our RNAV of S$12.04, taking into account higher stakes in UIC and raising our ascribed value from market price to NAV.

Economic slowdown. The downside risk to our projections is if residential sales are slower than our projections or if commercial properties and hotels operations are impacted by slower-than-projected growth in rental/room rates.

UOL Group's FY17 PATMI of S$891m is 210% higher y-o-y. Top line increased by 46% to S$2.1bn mainly due to the consolidation of UIC and JV companies of UIC/UOL Group, which contributed S$544.7m of the increase.
Stripping out the effect of this consolidation, revenue would have increased marginally by 14% (or S$103m). This is mainly from the progressive recognition of Principal Garden while revenue from hotel operations increased by 3% on the back of contribution from Pan Pacific Melbourne, acquired in July 2017.
Gross margin was lower at 33% due to a higher contribution from property development division on top of an accelerated depreciation of Pan Pacific Orchard of S$21.9m which is scheduled to be redeveloped into a new 340 “green” hotel.
On the back of strong FY17 results, the group declared a higher dividend of 17.5 Scts (15 Scts last year) and is expected to maintain this rate going forward.

With the lift in residential sentiment in 2017, the group’s Singapore projects are substantially sold out, achieving sales of more than S$1.5bn in the year.
Principal Garden (663 units, 99.8% sold at average of S$1,648 psf) and The Clement Canopy (505 units, 84% sold at average of S$1,341 psf) are the two wholly owned projects that are still in the market.
Under UIC, where most projects are more centrally located and have achieved TOP status, sales are moving at a more gradual pace as follows: V on Shenton (510 units, 73.4% sold at S$2,100 psf) and Mon Jervois (109 units, 82.7% sold at S$1,833 psf), Pollen & Bleu (106 units, 75.3% sold at S$1,708 psf) .
We note that UIC paid the additional buyer stamp duty of S$14.8m for an unsold project, likely to be Mon Jervois, in our view.
Looking ahead, UOL has acquired three land sites, totalling close to 925 units which will be launched from 2Q18 onwards. The upcoming launch will be 139-unit Amber 45 in 2Q18 at a target selling price north of S$2,000 psf which will set a new benchmark price in the area.

Park Eleven, Shanghai (398 units, 36.7% sold) is close to completion in 2Q18 where the group is expected to book in sales recognition upon TOP. Phase 1 of Park Eleven has achieved a sell-through rate of 88% at c.RMB77,000 psm while the new phase is set to be launched at a target price of RMB80,000 psm.
Bishopgate works are progressing and the group recorded an impairment charge of c.S$14m due to higher cost increases.

RevPAR increased by c.3.5% y-o-y to S$145.30 mainly driven by the group’s hotels in North America which saw a 15% y-o-y increase. Singapore operations appear to be on an uptrend, recording a 1.4% y-o-y rise.
Looking ahead, the group is looking to rejuvenate the portfolio through the redevelopment of Pan Pacific Orchard into a new “green” hotel, projected to complete in 2021.

UIC brings close to 4m sqft of commercial GFA to the group, of which a majority are located in the central business district (CBD). Occupancy rate across the commercial portfolio remained steady at > 95%.
The group has c.200,000 sqft of office space expiring across its properties (UOL and UIC) and 90,000 sqft of mall space (UOL and UIC) up for renewal in 2018 and is seeing a mixed outlook.
Management is generally more positive about office rental reversion and retention prospects on the back of the lack of office supply and maintains that the nearterm outlook for retail remains challenging.

Derek TAN DBS Vickers | Rachel TAN DBS Vickers | http://www.dbsvickers.com/ 2018-03-06

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 10.23 Up 10.150