UOL Group - DBS Research 2018-07-06: More Room To Maneuver

UOL Group - DBS Vickers 2018-07-06: More Room To Maneuver UOL GROUP LIMITED SGX: U14

UOL Group - More Room To Maneuver

  • Government surprised the market with the hike in ABSD and tightening of mortgages, just over a year after the government relaxed policy measures.
  • Buyer sentiment will be impacted.
  • More room in pricing being earliest to land bank at a lower price.
  • Downgrade to HOLD, lowered Target Price to S$7.82.



Downgrade to HOLD; lowered TP to S$7.82.

  • We downgrade to HOLD from BUY previously on UOL Group (UOL) and lowered our Target Price to S$7.82 from previously S$10.23 on higher discount to RNAV of 35% from previously 15%.
  • The surprised move by the government in hiking ABSD rates and tightening mortgates (just over a year after the government relaxed the policy measures) will hit buyer sentiment significantly.


Where we differ: More room in pricing with land bank acquired at a lower price.

  • Despite UOL being one of the proxies to Singapore property and negative buyers’ sentiment would impact its new property launches, we believe UOL may be less impacted as being the earliest to land bank at a lower price would allow UOL more room in pricing its properties. 
  • All of its landbank except Silat Avenue was acquired in 2016.


Potential catalysts:


Property sales remain strong despite change in sentiment, recovery in office rental rates and hotel RevPAR.

  • Recovery in office rental rates and hotel RevPAR could be a potential catalyst. Aside from its residential portfolio, we believe UOL’s office and hotel investment properties could potentially benefit from a recover on the office rental rates and hotel RevPAR from lack of new supply in the next few years. This provides a stable recurring income to compensate fluctuations in the development properties.


Valuation:

  • Downgrade to HOLD rating from BUY previously. 
  • We lower our Target Price to S$ 7.82 from S$10.23 previously, pegged to higher discount to our RNAV of 35%, taking into account the heightened uncertainty from government tightening measures.


Key Risks to Our View:


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.


CRITICAL DATA POINTS TO WATCH


Retail and office sub-segments to offer stable returns

  • UOL Group Limited (UOL) derives a significant 47-58% of its revenues from retail, office and hotel segments which should continue delivering stable cashflows in the coming years. While we see headwinds in both the retail and office segments ahead, we believe that the positioning and location of UOL’s portfolio of commercial properties, mainly along the fringe areas of the CBD, will result in lower volatility in rents.
  • UIC’s portfolio of investment properties are complementary to the group’s exposure in largely city fringe properties as a majority of the group’s properties are located in the central business district (CBD). io. With close to c.21% of the space up for renewal in 2018, the tight competitive supply within the CBD will, in our view result in potentially stronger rental reversionary prospects.
  • Its retail malls - United Square and Novena Square - are located in the Novena area, close to the emerging medical hub. The malls have formed a niche, which should result in high tenant stickiness. This is especially so for United Square, which houses tenants well known for providing various children’s education programmes. io. On the other hand, Novena Square’s tenant mix mainly caters to necessity shopping and the needs of the vicinity’s growth as a medical hub.

Hotel performance – weakness in Asia; overall outlook stable.

  • Growth will be driven by the acquisition of Pan Pacific Melbourne in 2017 while performances from hotels and serviced residences are expected to turn up on the back of stronger economic growth driving business travel. We expect the operational performance of the group’s hotels and residences in Singapore and Australia to turn up. Portfolio RevPAR is expected to improve to the tune of c.3% in 2018.
  • UOL is also revamping Pan Pacific Hotel Orchard into a 340- room “green hotel”, completing in 2021.

Presales for residential projects doing well amid muted residential outlook

  • As of FY17, UOL has substantially sold most of its projects (c.1,090 properties for S$1.05bn) that are completed or currently under development and has added three sites which could yield close to 925 units when launched over the coming two years. Management believes that the Singapore property market has found a steady state at current levels and the increase in industry sales volume has been encouraging.
  • The launch of the recently acquired sites at 45 Amber Road, Nanak Mansions and Raintree Gardens will be keenly watched given the group’s dwindling land bank.


Balance Sheet:


Balance sheet remains strong.

  • Debt-to-equity ratio is expected to remain stable at 0.3x from FY17A-FY18F. This leaves UOL with sufficient headroom to acquire projects/new sites when such opportunities come by.


Share Price Drivers:


Replenishing land bank key to income sustainability.

  • The group turns around its projects quickly and has little land bank on its balance sheet. UOL has always been active in land tenders to replenish its land bank especially in Singapore but remains selective given the high competitive environment seen in recent government land tenders. 
  • The ability to secure additional land bank at lower prices will mean upside to RNAVs and this could re-rate the stock

Strong transaction volumes to drive higher margins.

  • With the property market on an uptrend and we project a price increase of 6-10% over 2018-2019. We believe that UOL, as a proxy to the Singapore property market, is expected to see higher share prices in 2018. 
  • Stronger-than-expected rise in prices could mean prospects of higher margins for the group’s upcoming launches which will act as a catalyst for further re-rating.

Deep value from its hotel business.

  • We believe that deep value lies in the group’s portfolio of well-located hotels and serviced residences in Singapore, Malaysia and Australia. These hotels are held on a historical cost basis, which we believe is conservative compared to potential realisable value.


Key Risks:


Economic slowdown.

  • The downside risk to our projections is if residential sales are slower than projected or if its hotel operations are impacted by slower-than-projected RevPAR performance. 
  • The upside risks to our view and target price would be higher-than-expected selling prices or upgrades to the target prices of its listed investment holdings.







Rachel TAN DBS Vickers | Derek TAN DBS Vickers | https://www.dbsvickers.com/ 2018-07-06
SGX Stock Analyst Report HOLD Downgrade BUY 7.82 Down 10.230



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