UOL Group - DBS Research 2019-08-13: Buoyed By Fair Value Gains

UOL GROUP LIMITED (SGX:U14)

UOL Group - Buoyed By Fair Value Gains

UOL GROUP LIMITED (SGX:U14)'s 1H19 earnings improved on higher Fair Value gains; net profit (ex-Fair Value gains) fell marginally.
Ongoing projects had 75% take-up; Avenue South Residences expected to launch end-Aug19.
Marina Mandarin transitioning to PARKROYAL brand.
Maintain BUY; Target Price S$8.53.

UOL GROUP LIMITED (SGX:U14)’s 1H19 earnings grew to S$268m (+29% y-o-y, mainly due to higher fair value (FV) gains (+182% y-o-y) but offset by the accounting reversal of development property backlog of S$76.4 in 1H19 (vs S$15.3m in 1H18). All development property backlog previously recognised were fully amortised with the completion of Park Eleven, Shanghai and The Clement Canopy at end-1Q19.
Fair Value gains were mainly from the United Industrial Corp (SGX:U06) office portfolio, including Singapore Land Tower, The Gateway and UIC Building which saw a cap rate compression of 25bps. Velocity@Novena Square was uplifted by its ongoing Asset Enhancement Initiative (AEI). Excluding Fair Value gains, net profit fell to S$164m (2% y-o-y).
1H19 revenue fell 4% y-o-y, mainly due to lower contribution from property development (-10% y-o-y) and hotel operations (-4% y-o-y). These segments were impacted by lower occupancies and room rates at Marina Mandarin and PARKROYAL Darling Harbour, as well as ongoing refurbishments at PARKROYAL on Kitchener Road. However, these were offset by higher revenue from property investments (+3% y-o-y) in the UIC Building, maiden contribution from 72 Christie St, Sydney acquired in Dec18 and higher dividend income (+18% y-o-y).
2Q19 net profit was up (+48% y-o-y) to S$195m mainly due to higher Fair Value gains. Excluding these Fair Value gains, net profit was slightly down (-1% y-o-y).

Gross margins improved to 49% (vs 42% in 1Q19 and 45% in 4Q18) due to lower contribution from property development with lower margins and higher dividend income.

UOL’s ongoing projects (Amber45 and The Tre Ver) launched in May18 / Jul18 has achieved more than 75% sales take-up. Meyer House opened for private previews in May 2019 and sold 2 units as at June 2019 (3.6% take-up).
UOL is targeting to launch Avenue South Residences (1,074 units) in end-Aug 2019 and plans to launch in 3 segments at different price range. 70% of the project will comprise 1-2 bedroom units to ensure affordability.
In China, UOL received its sales permit and is targeting to launch phase 2 in 4Q2019. The approved sales price should be above Phase 1 prices of RMB77k psqm. In UK, UOL is targeting to soft launch One Bishopsgate Plaza (160 units) in 4Q19.

Marina Mandarin’s occupancy dropped and revenue per available room (RevPAR) fell by high single digits, affected mainly by its transition to a new operator effective 1 Jan 2020. United Industrial Corp has appointed PARKROYAL as its new operator and will rebrand under the PARKROYAL portfolio.
Overall, RevPAR fell by low single digits mainly due to its business in Singapore and China. Pan Pacific London (Bishopgate, London) is expected to open by mid-2020 while Pan Pacific Orchard (Singapore) is expected to open in 2021.
Office rental reversions positive. Overall office rental reversions were slightly positive, mainly led by positive rental reversions in the Central Business District (CBD) offices (mainly under the United Industrial Corp portfolio of assets).
Overall retail rental reversions were up 5% to 6% with high occupancy of 97%. Velocity@Novena Square continued to see strong double digit tenant sales growth. Kinex is still undergoing its mall repositioning and trade re-mixing.
Management expects office rental reversions to increase marginally moving forward, while retail rents will remain under pressure.

UOL’s management is currently in preliminary talks with the government, reviewing and exploring different options for redevelopments. Other than the Marina Square redevelopment, it is currently studying potential redevelopment / AEI projects, especially for the United Industrial Corp office portfolio.

We maintain our BUY rating on UOL and target price (TP) of S$8.53 based on a 35% discount to Revised Net Asset Value (RNAV).
Given its recent actions (gaining control in United Industrial Corp and now MCH), UOL is well positioned to unlock the value of its commercial and hospitality assets. The stock is currently trading at 0.6x FY19F P/NAV, close to 1SD (standard deviation) below its historical average in the last property cycle (FY13-17).
We believe that UOL can potentially trade closer to its NAV as it slowly unlocks more value from its commercial and hospitality assets. Our Target Price implies 0.8x P/NAV.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-08-13

SGX Stock Analyst Report BUY MAINTAIN BUY 8.530 SAME 8.530